Latin America Equity Research 12 November 2010
LatAm Year Ahead 2011 Stay Invested Head of Latin America Research Ben Laidler AC (1-212) 622-5252
[email protected] J.P. Morgan Securities LLC
Contents Strategy .........................................................5 Sectors.........................................................49 Economics and Commodities ....................113 LatAm Data................................................135 For a complete list of contributors to this report, please see table of contents on page 3.
See page 158 for analyst certification and important disclosures, including non-US analyst disclosures. J.P. Morgan does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision.
Ben Laidler (1-212) 622-5252
[email protected]
Latin America Equity Research November 2010
LatAm Year Ahead 2011 — Stay Invested What to own
What to avoid
• Brazil
• Chile
• Colombia
• Peru
• Argentina
• Materials
• Off-Index
• Utilities
• Discretionary
• Staples
• Financials
A detailed view of our country and sector recommendations within LatAm is available on page 14. For more detail please see country and sector pages.
• Telecoms Focus on sectors within countries rather than country recommendations.
10 Top Analyst Picks (See page 16)
Top Picks Vale PDG Realty Cemex Bradesco Santander Brasil Corporacion Geo ICA Grupo Mexico Copasa Brasil Foods SA
Country Brazil Brazil Mexico Brazil Brazil Mexico Mexico Mexico Brazil Brazil
To PT (%) 49.4 41.6 35.7 34.9 34.7 32.3 32.1 31.1 29.0 26.9
10 Stocks to Avoid (See page 17)
Stock to avoid Ecopetrol SQM Grupo Financiero Inbursa Telmex SA Fibria CPFL Energia IAM Bancolombia Buenaventura Eletropaulo
Country Colombia Chile Mexico Mexico Brazil Brazil Chile Colombia Peru Brazil
To PT (%) (36) (28) (24) (21) (13) (6) (4) (2) (1) 0
Source: J.P. Morgan. Note: To PT = Returns to analyst price target from 28 Oct 2010.
The year-ahead process The goal of this document is to present our key strategy themes for 2011 using most- and least-favored stocks from J.P. Morgan’s LatAm equity research team. This 150+ page handbook includes strategy sections from our country strategists as well as overviews on the outlook for each major company sector and the analysts’ top picks and stocks to avoid for the year ahead. Analysts were asked to pick 1-2 large cap stocks that should lead performance in 2011 as well as a large cap stock they expected to underperform. We are positive LatAm into 2011. Macro fundamentals are robust, credit conditions very supportive, EM fund inflows expected to remain strong. Valuations are not stretched, and the earnings backdrop robust. Risks range from the fiscal and interest rates outlook in Brazil, to the security situation in Mexico, and the presidential elections in 2011 in Argentina and Peru. Capital control risks also remain real, especially in Brazil.
2
Ben Laidler (1-212) 622-5252
[email protected]
Latin America Equity Research November 2010
Table of Contents Strategy LatAm Strategy (Ben Laidler) .......................................................................... 6 EM Equity Strategy (Adrian Mowat)............................................................... 18 Brazil Strategy (Emy Shayo Cherman).......................................................... 30 Mexico Strategy (Ben Laidler) ....................................................................... 32 Chile Strategy (Brian P Chase)...................................................................... 34 Colombia Strategy (Brian P Chase)............................................................... 36 Peru Strategy (Brian P Chase) ...................................................................... 38 Argentina Strategy (Brian P Chase) .............................................................. 40
Sectors Agribusiness, Pulp & Paper (Debbie Bobovnikova, CFA).............................. 44 Financials (Saul Martinez) ............................................................................. 50 Financials (SMid) (Frederic de Mariz)............................................................ 56 Food, Beverages & Tobacco (Alan Alanis) .................................................... 62 Homebuilders (Adrian E Huerta).................................................................... 70 Metals & Mining (Rodolfo R. De Angele, CFA) .............................................. 78 Oil, Gas & Petrochemicals (Sergio Torres).................................................... 86 Retail & Healthcare (Andrea Teixeira, CFA) .................................................. 92 Telecom, Media & Technology (Andre Baggio, CFA) .................................. 100 Utilities (Anderson Frey, CFA) ..................................................................... 106
Economics and Commodities Global Economic Outlook (Bruce Kasman) ................................................. 115 Brazil Economics (Fabio Akira).................................................................... 122 Mexico Economics (Gabriel Casillas) .......................................................... 123 China Economics (Qian Wang/Grace Ng/Lu Jiang)..................................... 124 China Infrastructure (Qian Wang/Grace Ng/Lu Jiang) ................................. 126 China FAI (Qian Wang/Grace Ng/Lu Jiang) ................................................ 130 Market Forecasts......................................................................................... 131 J.P. Morgan FX............................................................................................ 132 Commodities Forecasts............................................................................... 133
Appendix LatAm Data.................................................................................................. 135 Note: All ratings and prices are as of the close on October 28, 2010, unless otherwise noted. 3
Ben Laidler (1-212) 622-5252
[email protected]
4
Latin America Equity Research November 2010
Ben Laidler (1-212) 622-5252
[email protected]
Latin America Equity Research November 2010
Strategy
Ben Laidler (1-212) 622-5252
[email protected]
Latin America Equity Research November 2010
Ben Laidler AC
LatAm Strategy We are positive LatAm into 2011. Macro fundamentals are robust, credit conditions very supportive, EM fund inflows expected to remain strong. Valuations are not stretched, and the earnings backdrop robust. Risks range from the fiscal and interest rates outlook in Brazil, to the security situation in Mexico, and the presidential elections in 2011 in Argentina and Peru. Capital control risks also remain real, especially in Brazil. We are overweight Brazil relative to MSCI LatAm index, as valuations are reasonable, flows returning, and market overhangs – such as the Petrobras offering and the presidential election – are lifting. We also see outperformance from Colombia and Argentina. We are neutral Mexico, and underweight Chile. We focus on domestic stocks for which we see good growth and reasonable valuations, such as financials and homebuilders. Fundamentals to remain robust: 2010 and 2011 GDP growth expectations have been rising, and are above long-term potential GDP growth. This has been supporting the earnings revision cycle. Inflation expectations have also been rising, and Central Banks are expected to gradually tighten policy in 2011, within the constraint of appreciating currencies but partly offset by output gaps remaining in some countries. Long-term REERs point to the undervaluation of the Mexican Peso, and overvaluation of the Brazilian Real. For more on economics team’s view, please see Latin America Outlook Presentation. LatAm GDP outlook
LatAm Argentina Brazil Chile Colombia Ecuador Mexico Peru Venezuela
2010e Forecast Current Jan-10 forecast 4.4 5.7 4.0 8.5 6.2 7.5 5.0 5.5 3.0 4.5 2.0 2.5 3.5 4.5 5.5 8.2 1.0 -2.2
Source: J.P. Morgan Economics.
2011e Forecast Current Jan-10 forecast 3.4 4.1 3.0 5.5 4.0 4.5 5.0 6.0 4.0 4.1 3.0 3.0 2.5 3.5 6.0 6.0 2.5 1.0
Long-term potential GDP growth 3.4 3.5 4.0 4.2 4.5 3.0 2.5 6.0 3.0
(1-212) 622-5252
[email protected] J.P. Morgan Securities LLC Bloomberg JPMA LAIDLER <GO>
LatAm inflation outlook 2010e Forecast in Current Jan-10 forecast 7.2 7.3 9.0 10.5 4.7 5.4 2.5 3.8 3.8 2.7 4.0 3.4 5.1 4.8 2.0 2.4 40.0 33.0
Latin America Argentina Brazil Chile Colombia Ecuador Mexico Peru Venezuela
Source: J.P. Morgan Economics.
Credit conditions remain supportive: This could support a meaningful multiple rerating and increased equity fund flows and is already altering corporate behavior. The strong outperformance of EM corporates has significantly improved relative valuations. The lower LatAm cost of equity has pushed up ‘fair value’ for stocks. Regional corporates are responding by releveraging and stepping up M&A activity, and financials are boosting capital. EM corporates are seeing strong fund inflows. This is a mirror of what equities are seeing. We believe the drivers here are sustainable into 2011, with risk-free rates likely to stay very low, EMBI spreads tight, and the EM growth premium high. See our recent note for details: LatAm Strategy – Credit rally supports equities. LatAm ‘fair value’ vs 12m fwd P/E 15.0 13.0 11.0 9.0 7.0 5.0 03
03
04
05
06
12 mth Fw d PE Source: MSCI, IBES, Datastream.
6
2011e Forecast in Current Jan-10 forecast 6.8 7.3 10.0 12.0 4.6 5.1 3.0 3.4 4.0 4.0 3.8 3.8 4.0 4.0 2.5 2.5 40.0 35.0
07
08
09
Gordon Grow th
10
Ben Laidler (1-212) 622-5252
[email protected]
Latin America Equity Research November 2010
Implied P/E – LatAm corp’s & equities 21.0 18.0 15.0 12.0 9.0
P/E: CEMBI Latin IG - 19.5x CEMBI Latin - 17.4x CEMBI Latin HY- 12.6x MSCI LatAm - 11.9x
6.0 3.0 0.0 2001
2003
2004
2005
Cembi Latin HY
2006
Cembi Latin IG
2007
2008
MSCI LatAm
2009
2010
CEMBI LatAm Broad
Source: J.P. Morgan, MSCI, Datastream. * 12m fwd MSCI LatAm P/E and inverse of J.P. Morgan CEMBI Corporate Bond Yields.
EM fund flows continue strong: Year-to-date equity fund flows into EM have exceeded US$70 billion, above the previous record of US$64bn in 2009. These flows have been focused on ETF products and on EM and Asia funds. Flows into LatAm, as proxied by LatAm funds, have been poor. Fund flows should continue strong, as both global equity allocations increase, EM allocations within global equities are built, and LatAm flows within EM recover as Brazil ‘overhangs’ lift. This is a phenomenon across the asset class and has arguably been more powerful in corporate and FX markets so far. We generally see this as another source of upside risk to multiples. Risk here is from issuance, which has been high. Please see our weekly fund flows product for details: Herd Instinct. GEM fund cumulative US$bn flows 120
2006
2007
2008
90
2009
2010 69.7
60
64.4 40.8
30 22.4
0
(39.4)
(30) (60) Jan Feb Mar Apr May Jun
Jul
Aug Sep Oct Nov Dec
2010 LatAm fund flows, US$mn 2,500 1,500 500 (500)
ETF Flow s Total Flow s
(1,500) (2,500) Jan 10
Feb 10 Apr 10 May 10
Jul 10
Aug 10
Oct 10
Source: EPFR Global, J.P. Morgan.
Capital control risks: Virtually every EM CB has intervened, and a number already have controls. Pressure will likely continue, as we expect more FX appreciation, with US$ weakness to persist and EM inflows to build. We see ‘real’ capital controls, such as unremunerated reserve requirements and minimum holding periods, as unlikely. An increase in transaction costs – such as Brazil’s 2% equity IOF – is a last resort, but arguably near inevitable in this flows environment. It is not enough to change our positive view on Brazil, where the potential upside beats a moderate potential transaction cost increase. For details see our report: The threat from capital controls.
Source: EPFR Global.
7
Ben Laidler (1-212) 622-5252
[email protected]
Latin America Equity Research November 2010
Other risks: Brazil fiscal and rates outlook. In the short term we await to see the composition of Dilma Rousseff’s first cabinet and the outlines of fiscal policy going forward. This is important as an early indication of the policy direction of the new administration at a time when inflation expectations are drifting higher and the economy is growing above potential. Mexico security concerns. Investor angst here is high. We see this as an unfortunate issue that detracts from growth (1-1.5%pa) at a bad time, with the economy weak. We believe greater concerns here are likely overdone, with violence localized and largely between cartels. The risk is that this spreads to Mexico City or cartels decide to openly target the State and civilians. The electoral calendar in 2011 is significant. Peru presidential elections are in April, with three centrist candidates leading in the polls and leftist Ollanta Humala currently 4th. He is likely to rise somewhat (and this could unnerve markets) though unlikely to ultimately prevail. Argentina also goes to the polls in October. The political environment has been thrown open by the unexpected death of ex-President Kirchner. This potentially opens the way for a more market-friendly candidate, possibly from within the Peronist party. Valuations are not stretched: We do not see LatAm valuations as demanding, with most metrics within historical ranges or at discounts to peers’. LatAm is currently trading on 11.9x 12m forward P/E, compared to 11.6x for emerging markets and 11.5x for global equities. This 12m forward P/E is at the top end of the region’s 15-year average. As highlighted before, the current regional cost of equity would argue for significant multiple expansion from these levels. When comparing EM countries we are also careful to adjust for index composition. This makes commodity-heavy indices such as Brazil more expensive and staples-heavy indices such as Mexico and Chile somewhat cheaper. 15-year MSCI LatAm 12m fwd P/E 15.00 13.00 11.00 9.00 7.00 5.00
Chile Mexico Indonesia Korea South Africa EM Turkey India Brazil China Taiwan Russia
Sector-Neutral P/E 16.0 14.5 14.8 9.9 11.8 11.9 11.4 17.7 12.3 14.3 15.6 11.8
EM Latam Source: IBES, MSCI, J.P. Morgan.
Av erage
+1SD
-1SD
12 Mth Fwd P/E 17.8 15.3 15.3 10.0 11.7 11.6 10.9 17.0 11.1 12.0 12.9 6.6
Diff (1.8) (0.9) (0.5) (0.0) 0.2 0.3 0.5 0.6 1.2 2.3 2.8 5.2
Source: MSCI, IBES, J.P. Morgan. Sector-neutral P/E multiplies the country sector P/E by the MSCI Emerging Markets Index sector weight.
LatAm enjoyed a strong earnings recovery cycle in 2010. We expect this to stabilize in 2011. LatAm earnings growth (local currency) is forecast at 21% for next year versus 15% for developed markets. This is a high number, and we see risks as balanced. Commodity earnings have been easing – especially in steels and Petrobras. Domestic earnings have been moving higher as GDP expectations are raised, and earnings remain below all-time highs despite higher nominal GDP growth. Forecasts for Mexico and Brazil are very similar (~20-21%). LatAm EPS growth expectations
Colombia Peru S.Africa India Brazil EM Latam Indonesia Mexico EM Malaysia Russia Global DW China EMEA EM Asia Korea Chile Taiwan Turkey Argentina Czech
EPS Growth Expectations % 2010e 2011e 2012e 29.4 52.5 5.0 27.3 31.6 13.1 26.5 27.1 17.8 23.4 22.7 17.6 16.3 21.6 11.5 15.8 21.4 16.1 20.3 20.9 13.5 9.0 20.4 16.3 30.6 17.2 14.0 29.4 15.7 11.2 29.8 15.4 17.1 36.2 15.3 13.2 37.2 15.0 13.0 26.7 14.9 16.4 25.0 14.7 15.6 40.7 14.6 13.9 51.4 13.1 11.1 23.0 11.2 7.1 89.1 9.4 11.2 18.5 8.2 13.6 5.4 6.4 18.1 -4.8 3.3 5.7
Source: MSCI, IBES, J.P. Morgan.
95 97 98 99 00 01 02 03 04 05 06 07 08 10
8
Sector-neutral P/E
Ben Laidler (1-212) 622-5252
[email protected]
Latin America Equity Research November 2010
MSCI LatAm EPS revision cycle
1. The positive view is that lower risk-free rates are sustainable for 2011, as we forecast, and this justifies further multiple rerating. This could be significant. Our Gordon-growth ‘fair’ value target is near 15.0x earnings, over 30% above current multiples. This indicator has tracked well historically. Upside here is concentrated in Brazil. This targets 53% upside for the region and 70% for Brazil. Mexico is penalized by a potentially too aggressive 2.5% potential GDP growth.
150.0 140.0 130.0 120.0 110.0 100.0 90.0 80.0 Feb-09
Jun-09
Oct-09 2011 EPS
Feb-10
Jun-10
Oct-10
2010 EPS
Source: IBES, MSCI, J.P. Morgan.
MSCI Brazil domestic vs commodity 12m fwd earnings integer 180.0
3. The cautious view assumes both a derating and that earnings fall. A derating scenario back to long-term historical multiples (down 14%, from 12.0x to 10.5x earnings) and a 20% fall in index earnings versus current expectations, as we assume earnings growth only in line with nominal GDP growth. This shows 14% downside for the region, led by Colombia, with Chile defensive.
150.0 120.0 90.0 60.0 Jan 07
Aug 07
Mar 08
Oct 08 May 09 Dec 09
Brazil Commodities
2. The mid-case assumes current multiples are fair, at the top end of long-term historical ranges, and consensus earnings growth correct, at a reasonable premium to nominal GDP growth. This targets respectable 18% upside, with all countries closely clustered. This would be our Mexico base case.
Jul 10
Brazil Domestics
Source: IBES, MSCI, J.P. Morgan.
Attractive risk/reward for 2011 justifies continued bullish positioning. We run three valuation scenarios for 2011. The MSCI LatAm potential upside is 53% and the potential downside 14%. For details see our report: Measuring the risk/reward.
Our baseline view is somewhere between the more bullish two scenarios, looking for even lower Treasury yields and tight EM spreads, whilst the relative Emerging growth and earnings premium remain high, continuing to attract flows and support multiples. QE2 and recent developed market data have reduced downside tail-risks.
Summary year-end 2011 target and index levels LatAm Brazil Mexico Chile Colombia Argentina Peru
Positive Target 122,500 122,000 39,500 5,450 16,000 2,300 41,300
% Upside 53 70 8 8 1 (31) 101
Mid-Case Target 94,500 84,500 42,500 5,700 18,000 3,950 24,500
% Upside 18 18 17 13 14 19 19
Cautious Target 69,000 61,500 31,600 4,700 10,600 3,275 16,500
% Upside (14) (14) (13) (6) (33) (1) (20)
Source: J.P. Morgan estimates.
9
Ben Laidler (1-212) 622-5252
[email protected]
Latin America Equity Research November 2010
We remain overweight Brazil, with valuations significantly derated, strongly returning flows, and multiple overhangs (election, rate cycle, Petrobras, China slowdown) reduced. Fiscal policy and equity IOF risks remain but are manageable. The focus remains on domestic stocks, especially those with growth at reasonable multiples, such as financials and homebuilders. We have good growth visibility, the earnings revision cycle remains positive, and valuations ex-staples are all cheap/fair. Top-performing staples and retailers are expensive and will likely keep performing in this environment if they can continue delivering on earnings. However, this does not mean the risk/reward is attractive. We are selective and own CBD. We see cheap, underowned, but low-growth sectors – such as utilities and telecom – as value traps but have continued to selectively add where we see pockets of growth (such as NII Holdings and TSU). In our model portfolio, we are neutral energy (positive oil and E+P but cautious Petrobras), and underweight materials – we are positive Vale but own no Steels. The sector is cheap (though earnings are falling), underowned, and benefiting in the short term from perceived QE upside, though global growth remains subpar and the sector chronically oversupplied. Brazil macro outlook
We are neutral Mexico. The market has performed well in the last month on signs of a bottoming in US growth expectations (we took our global growth numbers up for the first time since April) and moderate Mexican consumer acceleration. We do not see Mexico as underweight, with the market well supported by a gradual US growth reacceleration, high equity market correlation, undervalued currency, easy monetary policy, and valuations less expensive than they ‘seem’. However, the traditional drivers of Mexican outperformance are lacking – major market sell-off, strong US data surprise, or strong local consumer recovery. We focus on domestic recovery plays – Televisa, First Cash, AMX – and special situations – Cemex and ICA. US Economic Activity Surprise Index 40.0 30.0 20.0 10.0 0.0 (10.0) (20.0) (30.0) (40.0) Jan 09
May 09
Sep 09
Jan 10
May 10
Sep 10
Source: Bloomberg, J.P. Morgan.
Mexico consumer confidence and formal employment
Source: J.P. Morgan Economics.
Brazil interest rate futures 13.0 12.5 12.0 11.5
Source: J.P. Morgan Economics, INEGI, IMSS.
11.0 10.5 10.0 9.5 Feb 10
Apr 10
Jun 10 Jan-11
Source: Bloomberg.
10
Aug 10 Jan-12
Oct 10
Ben Laidler (1-212) 622-5252
[email protected]
Latin America Equity Research November 2010
In the smaller markets, we struggle to see a sustainable second leg to the well-known (and very positive) Chilean story. Valuations are high, and the stocks we want to own (banks/discretionary) are even pricier. We do see further fundamental upside in Colombia on the ongoing reform agenda, investment grade outlook, and capital markets development, but would play this off index (through Copa and Pacific Rubiales) given high on-index valuations. We remain exposed to Argentina. Valuations have become expensive at first glance, but the outlook for real political change – however moderate – means the market still likely has upside. Penetration rates are low and nontraditional valuation metrics (franchise value, replacement cost) attractive. We stick with GF Galicia.
Colombia pension fund equity exposure to rise on multifunds/demographics Estimated End-2010 AUM 1 0.0 2 90.6 3 0.0 Total 90.6
Equity 0.0 39.4 0.0 39.4
% NM 43.5% NM 43.5%
Limit 0.0 40.8 0.0 40.8
% 20.0% 45.0% 70.0% 45.0%
Cushion 0.0 (1.4) 0.0 (1.4)
% NM -1.5% NM -1.5%
Pro Forma 2011 AUM 1 4.5 2 53.4 3 32.6 Total 90.6
Equity 0.9 24.0 22.8 47.8
% 20.0% 45.0% 70.0% 52.8%
Limit 0.9 24.0 22.8 47.8
% 20.0% 45.0% 70.0% 52.8%
Cushion 0.0 0.0 0.0 0.0
% 0.0% 0.0% 0.0% 0.0%
Source: Superfinanciera and J.P. Morgan estimates.
12 mth fwd P/E relative to MSCI LatAm: Smaller markets at premium to LatAm Can Cristina maintain her currently positive image?
3.7 3.2 2.7 2.2 1.7 1.2 0.7 0.2
60.0% 40.0% 20.0%
Jan-03 Feb-04 Mar-05 Apr-06 May -07 Jun-08 Jul-09 Aug-10 Chile Source: IBES, Datastream, MSCI.
Argentina
Peru
Colombia
0.0% J-08 M-08 S-08 J-09 M-09 S-09 J-10 M-10 S-10 Source: Management y Fit and J.P. Morgan.
11
Ben Laidler (1-212) 622-5252
[email protected]
Latin America Equity Research November 2010
Latin America Model Portfolio by Country Ticker Brazil Bradesco CBD Cetip Gafisa NII Holdings OGX PDG Realty Petrobras PN Santander Brasil TIM Participacoes Vale PN Mexico AMX Cemex First Cash ICA Televisa Chile Cencosud Colombia Copa Pacific Rubiales Argentina GF Galicia Peru EMF LATAM
BBDC4 BZ PCAR5 BZ CTIP3 BZ GFSA3 BZ NIHD US OGXP3 BZ PDGR3 BZ PETR4 BZ SANB11 BZ TSU US VALE/P US AMX US CX US FCFS US ICA* MM TV US CENCOSUD CI CPA US PRE CN GGAL US
Price* 245,843 36.5 66.1 19.1 14.3 42.6 22.9 22.2 27.0 25.0 34.1 28.9 33,431 58.0 9.2 29.5 33.3 22.9 5,971 3,717.2 3,120 50.6 33.4 254,619 15.1 3,376 79,524
Change 1M YTD (%) (%) 1.2 4.1 6.9 21.4 11.1 1.7 17.6 33.7 2.8 0.9 0.3 26.9 0.7 33.6 5.7 28.0 -1.4 -26.4 5.9 4.6 4.5 14.8 3.7 16.4 7.7 18.5 6.6 23.4 10.7 -19.1 10.4 32.9 8.2 9.2 21.1 10.3 3.9 38.6 14.0 116.1 6.5 58.1 -3.8 -7.1 18.0 116.4 21.7 65.0 51.9 162.8 14.8 47.9 3.1 11.3
Port. MSCI Weight (%) (%) 70.3 67.8 10.0 4.5 6.0 0.4 5.0 0.0 5.0 0.4 5.0 0.0 4.0 1.9 5.0 0.8 10.0 13.0 7.0 0.5 2.0 0.2 11.3 11.0 18.0 18.2 6.0 6.4 3.0 1.0 3.0 0.0 3.0 0.0 3.0 1.2 3.7 7.1 3.7 0.8 6.0 3.8 3.0 0.0 3.0 0.0 2.0 0.0 2.0 0.0 0.0 3.1 100.0 100.0
Dev. (%) 2.5 5.5 5.6 5.0 4.6 5.0 2.1 4.2 -3.0 6.5 1.8 0.3 -0.2 -0.4 2.0 3.0 3.0 1.8 -3.4 2.9 2.2 3.0 3.0 2.0 2.0 -3.1 0.0
P/E 10E (x) 12.9 14.1 30.5 31.2 17.0 25.5 nm 15.2 8.3 15.4 31.0 9.6 17.7 15.8 nm 17.2 31.1 22.4 19.6 38.9 25.9 10.6 37.2 14.9 24.8 19.9 14.2
P/E 11E (x) 10.6 12.7 24.9 23.5 12.7 13.0 nm 9.8 10.4 11.7 15.0 7.0 14.7 13.5 nm 14.7 22.5 17.5 17.6 30.3 17.0 7.7 13.8 14.0 17.6 15.1 11.6
EPS growth 10E 16.3 26.3 -7.7 22.0 31.3 -26.4 -96.4 67.8 -1.8 23.7 -41.9 202.0 9.0 -24.9 -233.3 23.7 -8.5 16.1 23.0 78.6 26.9 3.2 -266.7 5.4 24.5 27.7 15.8
ROE 10E (%) 13.7 21.8 6.9 38.2 9.3 8.9 2.1 13.3 10.3 11.6 5.2 23.3 16.5 25.0 -0.8 18.7 3.7 20.0 12.2 8.0 na na 18.2 na 14.5
Analyst
Saul Martinez Andrea Teixeira Frederic de Mariz Adrian E Huerta Andre Baggio Sergio Torres Adrian E Huerta Sergio Torres Saul Martinez Andre Baggio Rodolfo R. De Angele Andre Baggio Adrian E Huerta Ben Laidler Adrian E Huerta Rajneesh Jhawar Andrea Teixeira Jamie Baker Sergio Torres Saul Martinez
13.9
Source: Bloomberg, MSCI, J.P. Morgan estimates. All estimates are for the calendar year. Updated as of 3 November 2010.
Our LatAm model portfolio is a vehicle to express our strategy views on regional equity markets, sectors, and stocks. This portfolio will normally include stocks which will be constructed relative to the MSCI EM Latin America Index and will be updated on a regular basis through our ‘LatAm Key Trades’ publication. The portfolio is primarily driven by our fundamental analyst views, and we use our analysts’ published company valuation and estimates to support inclusion, but a strategy overlay is incorporated and hence the published strategy may on occasion differ from analyst views. Analyst ratings are driven by company attractiveness relative to their sector coverage, whereas we take a regional LatAm view. The portfolio can include: 1) non-Latin America listed stocks, to the extent the region is a significant company driver; and 2) stocks not currently covered by JPM analysts, to the extent these are heavily weighted MSCI Latin America Index companies, though these companies must always be incorporated at a neutral relative weighting so as to express no strategy or fundamental view. This portfolio has been run since November 2007. Year to date in 2010 the portfolio is up 22.0% compared to a rise for the MSCI LatAm index of 12.0%. This return is indicative only and is calculated on price returns only, excluding dividends but also excluding trading costs – which an invested portfolio would bear. Portfolio changes are implemented on the day of ‘Key Trades’ publication.
12
Ben Laidler (1-212) 622-5252
[email protected]
Latin America Equity Research November 2010
Latin America Model Portfolio by Sector Ticker Discretionary Gafisa PDG Realty Televisa Staples CBD Cencosud Energy OGX Pacific Rubiales Petrobras PN Financials GF Galicia Cetip Bradesco First Cash Santander Brasil Industrials Copa ICA Materials Cemex Vale PN Telecoms AMX NII Holdings TIM Participacoes Utilities EMF LATAM
Price*
GFSA3 BZ PDGR3 BZ TV US PCAR5 BZ CENCOSUD CI OGXP3 BZ PRE CN PETR4 BZ GGAL US CTIP3 BZ BBDC4 BZ FCFS US SANB11 BZ CPA US ICA* MM CX US VALE/P US AMX US NIHD US TSU US
667.8 14.3 22.2 22.9 628.8 66.1 3717.2 1161.3 22.9 33.4 27.0 1064.7 15.1 19.1 36.5 29.5 25.0 277.0 50.6 33.3 1219.1 9.2 28.9 588.6 58.0 42.6 34.1 383.9 79524.0
Change 1M YTD (%) (%) 2.1 9.2 2.8 0.9 5.7 28.0 21.1 10.3 3.4 21.9 11.1 1.7 14.0 116.1 2.6 -15.5 0.7 33.6 18.0 116.4 -1.4 -26.4 3.3 22.0 51.9 162.8 17.6 33.7 6.9 21.4 10.4 32.9 5.9 4.6 3.8 28.5 -3.8 -7.1 8.2 9.2 3.0 12.3 10.7 -19.1 3.7 16.4 3.6 8.1 6.6 23.4 0.3 26.9 4.5 14.8 2.3 9.2 3.1 11.3
Port. MSCI Weight (%) (%) 13.0 5.3 5.0 0.4 5.0 0.8 3.0 1.2 9.7 11.6 6.0 0.4 3.7 0.8 17.0 16.6 4.0 1.9 3.0 0.0 10.0 13.0 27.0 22.3 2.0 0.0 5.0 0.0 10.0 4.5 3.0 0.0 7.0 0.5 6.0 4.6 3.0 0.0 3.0 0.0 14.3 24.4 3.0 1.0 11.3 11.0 13.0 8.7 6.0 6.4 5.0 0.0 2.0 0.2 0.0 5.5 100.0 100.0
Dev. (%) 7.7 4.6 4.2 1.8 -1.9 5.6 2.9 0.4 2.1 3.0 -3.0 4.7 2.0 5.0 5.5 3.0 6.5 1.4 3.0 3.0 -10.1 2.0 0.3 4.3 -0.4 5.0 1.8 -5.5 0.0
P/E 10E (x) 17.6 17.0 15.2 22.4 24.0 30.5 38.9 10.9 nm 37.2 8.3 14.7 24.8 31.2 14.1 17.2 15.4 27.4 10.6 31.1 13.3 nm 9.6 12.4 15.8 25.5 31.0 11.7 14.2
P/E 11E (x) 13.8 12.7 9.8 17.5 19.8 24.9 30.3 10.2 nm 13.8 10.4 12.3 17.6 23.5 12.7 14.7 11.7 22.0 7.7 22.5 9.5 nm 7.0 10.7 13.5 13.0 15.0 10.7 11.6
EPS Growth 10E 27.9 31.3 67.8 16.1 21.5 -7.7 78.6 7.1 -96.4 -266.7 -1.8 19.6 24.5 22.0 26.3 23.7 23.7 24.6 3.2 -8.5 40.1 -233.3 202.0 15.4 -24.9 -26.4 -41.9 8.8 15.8
ROE 10E (%) 16.1 9.3 13.3 20.0 12.9 6.9 8.0 9.7 2.1 18.2 10.3 16.2 14.5 38.2 21.8 18.7 11.6 10.2 na 3.7 15.6 -0.8 23.3 27.1 25.0 8.9 5.2 8.7 13.9
Analyst
Adrian E Huerta Adrian E Huerta Rajneesh Jhawar Andrea Teixeira Andrea Teixeira Sergio Torres Sergio Torres Sergio Torres Saul Martinez Frederic de Mariz Saul Martinez Ben Laidler Saul Martinez Jamie Baker Adrian E Huerta Adrian E Huerta Rodolfo R. De Angele Andre Baggio Andre Baggio Andre Baggio
Source: Bloomberg, MSCI, J.P. Morgan estimates. All estimates are for the calendar year. Updated as of 3 November 2010.
LatAm Model Portfolio sector allocation relative to MSCI Emerging Latin America Markets Index
Discretionary Financials Telecoms Industrials Energy Staples Utilities Materials -12
-10
-8
-6
-4
-2
0
2
4
6
8
10
Source: MSCI, J.P. Morgan estimates. Updated as of 3 November 2010.
13
Ben Laidler (1-212) 622-5252
[email protected]
Latin America Equity Research November 2010
LatAm Model Portfolio country allocation relative to MSCI Emerging Latin America Markets Index
Brazil Colombia Argentina Mex ico Peru Chile -4.0
-3.0
-2.0
-1.0
0.0
1.0
2.0
3.0
Source: MSCI, J.P. Morgan estimates. Updated as of 3 November 2010.
Historical changes to model portfolio Nov 10 Sep 10 Aug 10 Jul 10 Jun 10 May 10 Mar 10 Feb 10 Jan 10 Nov 09 Oct 09 Sep 09 Aug 09 Jun 09 May 09 Apr 09 Mar 09 Feb 09 Dec 08 Oct 08 Sep 08 Aug 08 Jul 08 Jun 08 Apr 08 Feb 08 Source: J.P. Morgan Strategy.
14
Bought TIM Participacoes Cetip, OGX, Cemex GF Galicia, Banrisul, Cencosud Televisa, Banorte Gafisa, Copa Holdings NIHD, Cemex, First Cash Financial BM&F Bovespa, Metalurgica Gerdau, Vivo, Pacific Rubiales None ICA, CBD Santander Brazil, Cielo, Lan Airlines OGX, Silver Wheaton Itauunibanco, Geo, ALL Gerdau, Gafisa BM&F Bovespa, Banco Macro Ternium, Grupo Mexico Lojas Renner, Banorte, Santander Banco do Brasil, ALL, Tenaris, Geo Banco Itau, Entel, Slc Agricola, Cemex Porto Seguro, Bradesco, Credicorp Asur, Walmex, Bradespar, Urbi GVT,PDG Realty Homex Embraer Petrobras PN ADR, CCR, CTC, Coeur d'Alene Banco do Brasil, Megacable Urbi, Rodobens, Gafisa, Telecom Argentina
Sold BM&F Bovespa Banrisul, Banorte, Urbi Lan Airlines, OGX, Banco Macro Cemex, Ternium Metalurgica Gerdau, Tenaris Vivo, Grupo Mexico, Banorte Cielo, Gerdau, Silver Wheaton None Cemex, Lojas Renner, Gafisa BM&F Bovespa, Banco do Brasil, Santander Chile ALL, Televisa Banco Bradesco, Urbi, TAM Bradespar, GVT Porto Seguro, Credicorp Copa Holdings, Femsa. Embraer, Walmex, Entel Bradesco, SLC, Ternium, Asur Unibanco, Urbi, Gafisa, Santander Chile Telecom Arg., CCR, Banco do Brasil Banorte, Lojas Renner, Homex CTC, Coeur d'Alene, Rodobens Megacable, Urbi VCP Petrobras ON, NETC, Silver Wheaton B2W Cesp, Company SA, Cyrela
Ben Laidler (1-212) 622-5252
[email protected]
Latin America Equity Research November 2010
Analysts’ Top Picks Top picks Name Brazil AES Tiete Banrisul Bradesco Brasil Foods Cetip Copasa DASA Hypermarcas OGX PDG Realty Santander Brasil Sao Martinho Tim Participacoes Vale Mexico America Movil Cemex Compartamos Corporacion Geo FEMSA First Cash Financial Grupo Mexico Grupo Televisa ICA Chile Antofagasta CCU Falabella Colombia Exito Millicom Pacific Rubiales Peru Credicorp Silver Wheaton Argentina Grupo Clarin Tenaris
Share Price
Price Target
% Change to target
Bloomberg Ticker
JPM Rating
Analyst
Mkt Cap, US$ MM
P/E (X) 2010E
P/E (X) 2011E
EPS 2010E
EPS 2011E
Yield (%) 2011E
ROE (%) 2011E
23.5 18.0 34.8 24.4 18.0 26.4 20.6 28.0 21.7 10.6 24.5 21.6 32.2 31.8
27.0 20.0 47.0 31.0 20.0 34.0 18.0 30.0 20.3 15.0 33.0 13.0 40.0 47.5
15.6 2.6 26.7 23.5 3.7 21.6 -13.7 7.9 -10.1 36.6 27.2 -43.5 17.6 40.4
GETI4 BZ BRSR6 BZ BBDC4 BZ BRFS3 BZ CTIP3 BZ CSMG3 BZ DASA3 BZ HYPE3 BZ OGXP3 BZ PDGR3 BZ SANB11 BZ SLCE3 BZ TSU US VALE US
OW OW OW OW OW OW OW OW OW OW OW N OW OW
Anderson Frey Frederic de Mariz Saul Martinez Alan Alanis Frederic de Mariz Anderson Frey Andrea Teixeira Andrea Teixeira Sergio Torres Adrian E Huerta Saul Martinez Debbie Bobovnikova Andre Baggio Rodolfo R. De Angele
4,835 4,267 73,018 12,881 2,568 1,895 2,816 8,847 42,952 7,144 58,007 1,339 8,417 173,421
10.7 11.2 13.5 26.3 29.4 6.4 24.2 28.3 nm 14.5 15.1 33.2 29.5 10.9
9.9 9.6 12.1 14.4 22.2 6.0 18.7 20.7 nm 9.4 11.5 22.5 14.3 7.7
2.19 1.61 2.59 0.93 0.61 4.13 0.85 0.99 0.06 0.73 1.62 0.65 1.86 2.92
2.38 1.88 2.88 1.70 0.81 4.39 1.10 1.35 0.02 1.13 2.13 0.96 3.84 4.13
10.7 4.2 2.9 1.5 3.1 8.3 30.6 2.1 0.0 1.7 5.2 1.1 1.7 2.9
181.4 19.0 21.2 8.8 45.3 12.0 31.2 7.6 0.6 19.2 14.4 11.1 10.0 23.3
57.1 8.8 85.9 39.3 52.9 29.4 40.4 22.2 32.5
72.0 12.0 100.0 52.0 59.0 34.5 53.0 27.5 43.0
21.6 22.4 8.7 32.5 5.2 14.5 25.4 17.5 26.9
AMX US CX US COMPARTO MM GEOB MM FMX US FCFS US GMEXICOB MM TV US ICA* MM
OW OW OW OW OW OW OW OW OW
Andre Baggio Adrian E Huerta Frederic de Mariz Adrian E Huerta Alan Alanis Ben Laidler Rodolfo R. De Angele Rajneesh Jhawar Adrian E Huerta
119,244 9,800 3,216 1,762 20,060 913 26,902 13,699 1,781
15.8 nm 19.7 12.2 13.1 17.1 17.2 22.0 30.4
13.4 nm 16.1 9.6 11.5 14.6 10.9 17.2 22.0
44.98 -0.16 4.36 3.23 4.05 1.72 0.19 12.54 1.07
52.72 0.02 5.34 4.08 4.61 2.01 0.30 16.02 1.48
0.7 0.0 1.3 0.0 8.0 0.0 5.2 1.4 0.0
26.1 0.1 34.8 22.0 11.0 17.9 24.6 23.0 4.9
1326.0 56.1 4849.5
1100.0 62.0 4556.0
-23.0 5.5 -4.5
ANTO LN CCU US FALAB CI
OW OW N
Amos Fletcher Alan Alanis Andrea Teixeira
22,718 3,744 23,833
16.5 15.1 38.5
11.4 13.7 31.4
80.30 3.70 125.92
116.50 4.08 154.40
0.5 4.5 0.8
116.5 21.6 13.0
23080.0 94.7 31.7
17800.0 120.0 36.0
-27.7 28.9 8.1
EXITO CB MICC US PRE CN
N OW OW
Andrea Teixeira Jean-Charles Lemardeley Sergio Torres
4,477 10,140 8,843
55.5 14.2 35.2
42.8 11.8 13.0
415.58 6.69 0.90
539.80 8.00 2.43
0.0 7.3 0.0
4.3 26.1 34.1
124.7 27.6
120.0 31.0
-5.9 -11.6
BAP US SLW US
N OW
Saul Martinez John Bridges
10,171 12,106
17.2 38.3
15.2 21.0
7.23 0.72
8.20 1.31
1.7 0.0
22.1 18.5
10.0 41.3
9.0 52.0
-10.0 14.8
GCLA LI TS US
OW OW
Rajneesh Jhawar Sergio Torres
1,437 26,733
3.4 20.1
2.5 16.0
2.92 2.06
4.00 2.59
0.0 0.9
12.7 14.8
Source: Bloomberg, J.P. Morgan estimates. J.P. Morgan ratings: OW = Overweight; N = Neutral; UW = Underweight.
15
Ben Laidler (1-212) 622-5252
[email protected]
Latin America Equity Research November 2010
Analysts’ Top Stocks to Avoid Top stocks to avoid Name Brazil Cyrela Brazil Realty Eletropaulo Fibria Minerva SA Panamericano Tele Norte Leste Usiminas Mexico Consorcio Ara Grupo Inbursa Organizacion Soriana Telmex SA Chile IAM SQM Colombia Bancolombia Ecopetrol Peru Buenaventura Argentina Edenor
Share Price
Price Target
% Change to target
22.8 29.9 30.0 6.1 7.7 48.5 21.0
29.0 30.0 26.0 8.1 10.0 57.0 26.0
30.3 0.0 -16.7 34.1 37.7 14.9 13.3
7.6 53.9 37.2 15.2
9.0 41.0 31.0 12.0
747.0 51.5
Bloomberg Ticker
JPM Rating
Analyst
Mkt Cap, US$ MM
P/E (X) 2010E
P/E (X) 2011E
EPS 2010E
EPS 2011E
Yield (%) 2011E
ROE (%) 2011E
CYRE3 BZ ELPL6 BZ FIBR3 BZ BEEF3 BZ BPNM4 BZ TMAR5 BZ USIM5 BZ
UW UW UW N UW N UW
Adrian E Huerta Anderson Frey Debbie Bobovnikova Alan Alanis Frederic de Mariz Andre Baggio Rodolfo R. De Angele
5,536 3,229 8,587 376 1,043 7,699 14,775
12.1 4.8 17.1 10.6 12.1 5.6 20.5
9.9 8.4 96.9 5.8 7.2 6.7 11.1
1.88 6.29 1.76 0.58 0.64 8.60 1.02
2.31 3.54 0.31 1.05 1.07 7.21 1.88
0.0 13.8 0.0 0.0 8.0 8.9 3.1
20.1 18.0 5.0 10.8 16.4 14.9 8.8
15.5 -21.6 -17.6 -24.3
ARA* MM GFINBURO MM SORIANAB MM TMX US
UW UW UW UW
Adrian E Huerta Saul Martinez Andrea Teixeira Andre Baggio
829 14,247 5,536 14,410
11.5 25.3 21.6 12.7
9.9 21.0 18.9 13.2
0.66 2.13 1.72 18.51
0.77 2.57 1.97 17.30
1.3 1.4 0.4 5.0
10.1 12.2 9.7 37.0
720.0 37.0
-4.0 -29.4
IAM CI SQM US
N N
Anderson Frey Brian P Chase
1,561 13,799
16.1 43.6
16.1 30.4
46.36 1.18
46.36 1.69
5.9 0.0
8.1 24.6
66.0 4360.0
65.0 2795.0
-3.9 -39.9
CIB US ECOPETL CB
UW UW
Saul Martinez Sergio Torres
13,322 102,728
20.0 22.1
17.9 14.9
3.30 197.47
3.68 292.19
1.8 3.3
18.4 34.5
51.7
46.0
-16.9
BVN US
N
John Bridges
15,262
19.8
14.6
2.61
3.55
0.9
26.5
10.3
na
na
EDN US
UW
Anderson Frey
485
13.3
12.2
0.77
0.84
0.0
7.0
Source: Bloomberg, J.P. Morgan estimates. J.P. Morgan ratings: OW = Overweight; N = Neutral; UW = Underweight.
16
Ben Laidler (1-212) 622-5252
[email protected]
Latin America Equity Research November 2010
Emerging Market Equity Strategy The Drivers
Potential Returns
1. The declining EM risk premium continues
MSCI EM end-2011 target 1500 (+25%) • Forward PE at 1500 is 13 (based on consensus 2012 EPS)
2. Strong demand from EM credit continues 3. High nominal growth and nominal FX appreciation 4. DM neither a driver nor a drag
• Current credit conditions, FX appreciation, earnings growth, and earnings estimate revisions provide upside Other targets KOSPI 2300, NIFTY 7000
Investment themes
Risks
1.
China drifts away from the Asian growth model
2.
Structural OW on domestic demand
3.
FDI in non-China EM increases
4.
Growth premiums continue to expand
5.
CEMBI Surfers still riding in 2011
6.
Warning flags: Real credit growth and core CPI
7.
Beware co-investing with governments
8.
Liquidity without a valuation anchor
9.
Higher REER bad for exporters’ margins
Market Risks • Lack of valuation cushion • Bond market volatility • High correlation Policy and Political risks • Capital controls • Anti-asset inflation policies • Trade wars • Leadership change in China, Thai and Philippines elections • Strained social contract Economic risks • Uncertain outlook for commodities • Unintended consequences of QE2 • Public sector debt stress in developed economies
Key issues for 2011 – Briefing notes
Market Performance
1.
Scale of emerging markets
MSCI EM and MSCI World performance
2.
Capital controls and FX intervention
1250
3.
Western-China-driven growth
1050
4.
Strength of consumption in China
5.
China’s infrastructure investment
6.
Will China have a housing inventory problem?
MSCI EM
850 650 450 250
MSCI World
50 88
90
92
94
96
98
00
02
04
06
08
10
Source: Bloomberg, 8 November 2010.
17
Ben Laidler (1-212) 622-5252
[email protected]
Latin America Equity Research November 2010
Emerging Market Equity Strategy We are bullish on EM equities. Our end 2011 target for MSCI EM is 1500 (+25%). Based on consensus 2012 EPS the forward PE at 1500 is 13. Current credit conditions could support a larger re-rating (please see page 27 for potential returns). MSCI EM life high is 1338 (29 October 2007). What about the biggest bull market of your career? Between 11 March 2003 and 29 October 2007 MSCI EM increased from 270 to 1338; +395%, or an annualized return of 38%. On 2 March 2009 EM was 475. The index is 140% higher today. To match the 2003/7 bull market MSCI EM would need to be 2351 by 20 October 2013. This requires an annualized return of 21%. In last year’s Emerging Markets Year Ahead our end2010 MSCI EM target was 1200. The index is within 5% of this target. But the ride was not smooth; between 15 April and 25 May the index declined by 19% to 855. Zero interest rates, QE2, currency wars, and high correlation across asset classes are likely to lead to volatility in 2011. Even with this year’s volatility, EM volatility-adjusted returns are the highest for growth assets. Our asset allocation starts with long-term trends (EM consumer, China’s changing economic policy, sector RoEs and investment cycles, currencies, etc.) combined with short-term tactical allocation driven by market factors (relative valuations and performance, retail activity, consensus positioning). Benchmark composition often represents historical rather than future growth trends. We are bullish on the Brazilian and Chinese domestic economies yet have been underweight these markets in 2010. We have been overweight Brazilian and Chinese domestic demand but underweight the larger sectors, i.e., energy, materials and Chinese SoEs. As was the case in 2010, focus on sectors within countries rather than simple country asset allocation (see page 26). Investors are seeking carry, growth and momentum. Both emerging fixed income and equity markets offer this. For now it is foolish to fight the trend. But remember the risks (see page 31). QE2 is an experiment. China’s ability to rebalance the driver of growth from investment to consumption is also an experiment.
18
Monitor the data; core inflation, property sales, actual commodity demand rather than financial demand, etc. MSCI EM performance 1400 1200 1000 800 600 400 200 Jan-00
Jan-02
Jan-04
Jan-06
Jan-08
Jan-10
Source: Bloomberg.
Valuations in EM trend rather than mean revert 42 37
Forw ard PE based on Trend EPS
32 27 22 17
Forw ard PE based on
12
Consensus EPS
7
88 89 90 91 92 93 95 96 97 98 99 00 02 03 04 05 06 07 09 10 Source: Datastream, MSCI, IBES. Note: MSCI EM fwd PE based on trend and consensus EPS. The trend EPS is calculated by plotting a trend line through the log chart of MSCI EM realized EPS.
Higher risk-adjusted returns in EM 2.5 2.0 1.5 1.0
EM US
0.5 0.0 -0.5 -1.0
World
-1.5 Jun-07 Dec-07 Jun-08 Dec-08 Jun-09 Dec-09 Jun-10 Source: Bloomberg Note: EM, US and World: Three-month rolling returns adjusted for 90-day volatility.
Ben Laidler (1-212) 622-5252
[email protected]
Latin America Equity Research November 2010
There is limited statistical evidence of valuations mean reverting in EM (see figure on previous page). Investors should focus on factors that are currently driving a re- or derating. The rerating factors are: 1. 2. 3. 4.
Expanding growth premium in a low-growth world Equities are cheap relative to sovereign and corporate bonds Accelerating investment and consumption growth in key EMs Lower relative risk profile of EM versus DM
Base Case In the risk section on page 31 we highlight the risks to our base case. The declining EM risk premium continues Emerging economies survived the big ugly experiment of an extreme external demand shock and a credit crisis. This hit EM economies when they were a year into a tightening cycle. In passing this test and with the economies recovering ahead of developed economies, the risk premium demanded for EM should decline. Note that stock-specific risk (corporate governance, transparency, policy risk, etc.) is still higher. Strong demand for EM credit and carry continues Investor appetite for risk has slowly increased since 9 March 2009. The bias is corporate credit for yield and emerging markets for growth. EM US dollar and local currency credit offers both and is thus attracting large flows relative to its market cap. J.P. Morgan forecast for this to continue in 2011. We maintain our CEMBI surfer theme of favoring current account deficit markets. High nominal growth and nominal FX appreciation Data support positive nominal GDP revisions. These data include strong retail sales, car sales and loan growth. EM Central Banks are slowing FX appreciation but not reversing the trend.
EMBI and earnings yield spread between EM and DM 1600
Earnings Yield Spread betw een
1400
EM and DM (RHS)
1200
6 5 4
1000
3
800
2
600
1
400 200
0
EMBI Spread (LHS)
-1
0 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 Source: Bloomberg, MSCI.
EM net debt inflow (Cum. USD bn) 80 2010
59
60 2007
40 20
34
2009
0
31
-14
2008 -20 Jan Feb Mar Apr May Jun
Jul Aug Sep Oct Nov Dec
Source: J.P. Morgan estimates and EPFR Global.
EM net equity inflows (Cum. USD bn) 80
2010
60
69
64 41
40 2009
20
2007
0 -20
-40
-40
2008
-60 Jan Feb Mar Apr May Jun
Jul Aug Sep Oct Nov Dec
Source: EPFR Global.
DM neither a driver nor a drag Focus on the local EM dynamics rather than swings in net exports. Economic expansion in the US and Euro Area resumed in 3Q09. J.P. Morgan forecast 2011 GDP growth of 2.5% and 1.5% for the US and Euro Area respectively. This growth may be politically unacceptable as it is too slow to reduce unemployment, but for EM, slow DM growth is a benign to positive backdrop. It is benign for external demand and positive as interest rates remain low. 19
Ben Laidler (1-212) 622-5252
[email protected]
Latin America Equity Research November 2010
Investment Themes China drifts away from the Asian growth model China is a souped-up version of the Asian growth model. Investment rather than consumption drives growth. This requires a transfer of wealth from the household sector to the corporate sector through low wages, low return on savings and undervalued currency. 2010 policy and the 12th Five-Year Plan all point to a move toward consumption. This is a long-term positive. But it may mean that the growth in Chinese commodity demand is overestimated. Beneficiaries of the change are a small part of the benchmark, which may result in ongoing underperformance of MSCI China. Structural OW on domestic demand This is where the growth is (globally). We acknowledge that these stocks do trade at a premium and the call is consensus. Beware co-investing with governments A third of MSCI market cap is companies in which governments are the controlling shareholder. It can be profitable being a minority shareholder in these companies when the major shareholder offers favorable policies and is focused on returns. With today’s flood of capital into EMs, investor-friendly policies may not be a top priority and thus these companies could be at risk from politically expedient policies. SoEs are 79% of MSCI China market cap. Policies designed to boost consumption by increasing the household income-to-GDP ratio will reduce the ratio of profits to GDP. SoEs in our view are particularly vulnerable to policy risk. Our structural bias is to be underweight SoEs. Russian oils stocks’ underperformance is notable, with Rosneft, Lukoil and Gazprom unchanged year to date. In contrast, Russian financials are up 25% ytd. Gazprom, with one-sixth of the world’s oil reserves, has a 2011e PE of 4. Russian energy stocks are unlikely to rerate while the market fears higher taxes.
Household income growth lagging tax and profits 800%
748%
GDP Gov ernment Profits Income
700% 600% 500% 400% 300%
512% 343%
200% 100%
258%
0% 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 Source: J.P. Morgan economics. Note: Income proxy is the change in urban per capita household income; Profits are the growth in aggregate industrial profits.
EM and US as a share of global consumption % 40
US
35 EM
30 25
20 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 Source: J.P. Morgan economics.
Ownership structure in MSCI EM MNC 5%
Institutional 27%
Gov ernment 30%
Family Cross h
h ldi
Source: MSCI, Datastream, J.P. Morgan Strategy.
20
19%
Ben Laidler (1-212) 622-5252
[email protected]
Latin America Equity Research November 2010
FDI in non-China EM increases Higher labor cost, strengthening Renminbi and tensions between Japan and China improves the attractiveness of other emerging markets for FDI. The main beneficiaries are ASEAN, Turkey and Mexico. Note in table below that a small change in China’s share of FDI could lead to a large increase in FDI in ASEAN. FDI into China and ASEAN
EM equities cheap relative to bonds
US$ billions 2007 2008 2009
China 138.4 147.8 78.2
Indonesia 6.9 9.3 4.9
Malaysia 8.6 7.2 1.4
Philippines 2.9 1.5 1.9
Thailand 11.3 8.6 6.0
Source: CEIC.
CEMBI (1/y ld)
20
Fw d PE
17 14
Warning flags: Real credit growth and core CPI Central banks responding to inflation have always ended the bull market in EM. As of now EM central banks have maintained a pro-growth bias even when headline inflation is higher than the target level. Each week we publish a detailed table on inflation in our dashboards. The warning flags are a combination of higher real credit growth and rising core CPI. These conditions increase the probability of the central bank moving to a policy designed to slow growth in order to fight inflation. EM equities are growth assets. Lower growth and higher discount rates result in a derating. Real credit growth and Core CPI China Brazil Korea Taiwan India South Africa Russia Mexico Malaysia Indonesia Turkey Thailand
CEMBI surfers still riding in 2011 Demand for EM credit remains strong (see Error! Reference source not found.). The yield on the emerging market corporate bond indices (CEMBI) is 5.3%; this is lower than the average investment grade bond yield in past decade (JULI). Our bias is to own current account deficit markets when credit conditions are favorable; OW India and Turkey.
Real Credit Growth %oya 15 14 3 4 9 2 0.1 3 11 14 16 4
Core CPI %oya 0.7 5 2 0.7 9 3 5 4 1.1 5 4 1.1
Source: CEIC, J.P. Morgan economics, Bloomberg and central bank websites, September 2010. Note: Credit growth as of June 2010 for China, Korea, Taiwan, India, Malaysia, Indonesia, Thailand and August 2010 for Brazil.
Growth premiums continue to expand Lack of developed world growth combined with low discount rates supports high growth premium. Maintain a structural bias to high growth themes; EM consumer. Compare valuations with other growth stocks rather than markets.
11 8 5 01
02
03
04
05
06
07
08
09
Source: MSCI, Bloomberg, J.P. Morgan Indices. Note: The inverse of the CEMBI yield is used to compare PEs with EM corporate bond yields.
Liquidity without a valuation anchor The range of valuations since late 2007 is extremely wide. Correlation of risk asset is high, indicating that asset-specific fundamentals are secondary to general market trend. Higher commodity prices are partly justified by monetary conditions rather than supply or demand. Equities are inexpensive relative to bonds but if economic activity improves then bonds are expensive. Risk assets march in step: Correlation with MSCI US 0.8 0.6
JPM Industrial Metals Index JPM Precious Metals TR
0.4 0.2 0.0 -0.2 -0.4 -0.6
JPM TR Energy 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10
Source: Bloomberg, J.P. Morgan indices. Note: Three year correlation of monthly returns of MSCI US vs. JPMCI Energy, Precious metals and Industrial metals.
21
Ben Laidler (1-212) 622-5252
[email protected]
Latin America Equity Research November 2010
The lack of valuation anchors in equities, bonds, commodities and currencies means a wide range of possible returns and high volatility. It is critical to keep monitoring the fundamentals while acknowledging that the near term drivers of markets are dominated by momentum and casual relationships between asset classes. When implied volatility is low, consider buying protection. Remember that the 2003/7 EM bull market had five 15-20% corrections. YTD Returns and Correlation with MSCI US Topix Energy US cash GSCI TR Global Gov Bonds MSCI Europe EM FX US Fixed Income MSCI AC World EM Local Bonds US High Grade S&P500 MSCI EM EM $ Corp. EMBIG Gold
Year to date return -6 -4 0.2 4 6 7 8 9 9 10 11 12 15 16 17 27
3 year correlation of monthly returns with MSCI US 0.8 0.6 -0.4 0.6 -0.3 0.9 0.8 0.2 1.0 0.5 0.4 1.0 0.9 0.6 0.7 0.1
Source: Bloomberg.
Higher REER bad for exporters’ margins Capital-flows support EM FX appreciation. Nominal appreciation combined with inflation differentials results in a real effective exchange rate appreciation. In China there have been a number of large wage increases in foreign owned export factories. This is bad for margins. Avoid export industries in Brazil and China with a large labor cost.
Movement in major currencies AUD ZAR BRL KRW IDR PLN CZK MXN HUF THB TRY SGD JPY MYR RUB INR TWD PHP CNY HKD -20 -10
10
Av g 05-07 Source: Bloomberg.
22
0
20
30
40
50
60
Mar low
70
Ben Laidler (1-212) 622-5252
[email protected]
Latin America Equity Research November 2010
Focus on sectors within countries rather than country recommendations The table below provides a level summary of our views on sectors within countries. Financials is 26%, Materials is 15% and Energy is 14% of EM. All recommendations are relative to EM. The Industrials sector consists of an eclectic group of stocks. We do not rate the sector. Key country and sector recommendations, performance and fundamentals Country/Sector
Wt
Rec
Demand Classification
EM China China Financials China Energy China Telecom China Industrials China CS China Materials China CD Brazil Brazil Financials Brazil Materials Brazil Energy Brazil CS Korea Korea IT Korea Financials Korea Industrials Korea Materials Korea CD Taiwan Taiwan IT Taiwan Financials Taiwan Materials India India Financials India IT India Energy South Africa SA Materials SA Financials SA Cons Discr SA Telecom Russia Russia Energy Mexico Mexico Telecom Mexico CS Malaysia Indonesia Turkey Turkey Financials Thailand Chile Poland Philippines Hungary Czech Republic
100 18.5 7.2 3.2 2.1 1.5 1.1 1.0 1.0 16.2 4.3 4.0 3.7 1.4 13.4 3.4 2.1 2.3 1.9 2.1 10.5 6.0 1.6 1.4 8.1 2.3 1.3 1.1 7.4 1.9 1.9 1.0 1.0 6.0 3.3 4.3 1.6 1.1 2.8 2.3 1.8 1.1 1.7 1.7 1.6 0.5 0.4 0.4
-N N UW UW n/a OW UW OW N OW N UW N UW UW UW n/a N OW N N OW N OW OW OW OW N UW N OW OW N UW UW N UW OW N OW OW OW N N OW N N
DD GPT DD 50% DD DD GPT DD DD GPT GPT DD GC/C DD 60% DD GPT GC GC/C DD GPT DD GCap GPT GPT DD DD DD GPT DD DD
DD
Jan 06 to date 64 149 215 144 111 92 303 132 133 146 159 201 130 185 28 11 -17 72 192 55 19 4 6 87 123 153 84 202 53 33 39 106 60 5 -20 58 86 100 108 227 55 78 101 145 19 123 1 25
Performance (USD Returns) EM low 12M to date 154 24 167 15 173 9 236 27 53 12 176 17 225 36 335 9 272 28 190 9 260 25 219 13 126 -18 227 29 163 32 155 23 92 5 226 51 270 43 283 70 102 21 97 16 117 11 114 37 186 39 209 48 171 50 140 23 182 36 210 31 162 35 320 58 147 25 154 10 115 -3 136 31 116 27 144 40 108 33 259 48 225 57 316 69 224 72 174 56 94 23 159 48 134 6 54 -10
PE YTD
10E
11E
EPS Growth (%) 10E 11E
17 12 10 21 14 15 14 8 11 7 21 11 -17 25 19 7 3 39 17 49 8 1 6 24 25 42 27 10 24 16 23 40 19 8 -2 21 24 19 32 36 43 50 58 41 19 40 4 -3
13.5 14.3 12.9 12.6 12.9 14.9 22.7 17.0 18.4 13.5 14.6 11.5 11.6 23.5 10.6 9.5 10.6 13.9 10.1 10.6 14.1 12.6 19.6 16.8 20.8 24.9 24.8 16.5 14.6 19.5 12.3 17.0 12.9 7.8 5.6 17.8 13.5 23.2 17.7 17.4 11.6 10.7 15.2 19.7 13.7 18.8 12.9 10.8
11.6 12.2 10.6 11.4 12.1 13.6 18.8 12.5 15.6 11.2 12.3 8.1 12.0 19.0 10.0 10.6 8.8 12.1 9.7 8.9 12.7 11.4 15.0 15.4 17.0 19.8 20.4 13.2 11.6 12.5 10.4 14.1 10.8 6.2 4.8 14.8 11.7 19.3 14.8 14.7 10.8 10.2 13.2 17.2 11.7 16.4 10.0 10.2
28.4 26.8 25.7 26.2 3.0 64.7 13.7 54.2 38.3 15.5 17.2 87.8 -15.0 21.3 46.7 82.8 61.7 42.3 22.9 9.2 86.7 125.1 29.0 28.9 19.8 17.5 15.8 40.1 28.0 236.8 14.9 19.3 18.5 44.0 25.9 7.4 13.7 -5.0 25.7 19.9 18.4 14.4 17.2 22.3 25.0 18.1 -3.4 -2.4
16.3 17.6 21.7 10.4 6.9 10.1 20.9 36.2 18.1 20.1 18.8 41.5 -3.1 23.6 5.3 -10.4 19.5 14.3 3.2 18.9 11.5 10.5 30.6 9.3 22.2 25.3 21.2 24.7 25.8 55.8 18.7 20.8 19.0 25.0 16.2 20.4 15.5 20.4 19.7 17.7 8.0 5.1 15.0 15.0 16.7 14.2 29.6 5.5
EPS CAGR (06-11)
EPS CAGR by SD
8.4 14.1 26.2 10.4 9.3 10.5 17 2.5 13.4 9.2 10.7 14.6 0.7 16.2 10.3 11.0 1.6 9.9 13.7 27.4 4.3 3.4 20.1 -0.8 12.7 15.7 13.3 12.7 8.9 20.3 3.9 11.9 9.1 6.8 6.2 5.5 16.4 18.7 7.6 18 12.8 20 5.9 18.2 1.1 4.3 -4.9 8.7
0.5 0.9 1.1 0.7 0.8 0.2 1.5 0.1 0.8 0.6 0.6 0.2 0.0 0.3 0.3 0.0 0.0 0.3 1.7 0.5 0.1 0.0 0.0 0.0 0.8 1.6 1.3 0.9 0.4 0.2 0.2 1.2 0.7 0.3 0.4 0.3 1.5 0.6 0.3 1.1 0.8 0.8 0.2 1.5 0.1 0.3 -0.2 0.6
PEG Ratio
DY (%) 10E
ROE (%) 10E
1.7 1.1 0.5 1.3 1.4 1.7 1.2 7.6 1.5 1.5 1.4 1.1 13.4 1.7 1.0 0.8 8.0 1.4 0.7 0.4 3.5 4.1 1.1 NM 1.9 1.7 2.0 1.7 2.1 4.4 3.4 1.8 1.6 1.2 0.9 4.3 1.1 1.3 2.4 1.1 0.9 0.5 2.6 1.2 12.8 4.8 NM 1.2
2.4 2.5 2.9 3.2 3.3 1.8 1.6 1.4 1.8 2.6 2.7 2.4 1.9 2.5 1.0 0.1 2.2 1.0 1.1 0.7 3.4 3.4 2.6 3.9 1.2 1.0 1.3 1.1 2.9 1.9 4.1 1.9 3.2 1.9 2.2 2.4 3.9 1.4 3.1 2.3 2.4 1.8 3.0 1.7 3.2 3.4 3.0 6.4
14.8 16.2 17.7 17.4 15.2 11.7 17.7 11.8 21.6 14.1 16.2 17.9 10.1 12.8 14.2 17.8 10.6 12.6 15.2 17.6 13.4 16.4 6.9 11.3 16.1 11.8 24.7 15.9 15.3 12.7 12.3 17.2 20.8 13.3 14.2 16.4 41.4 14.3 12.6 24.2 17.7 18.4 15.8 11.6 11.8 16.0 10.4 17.5
Source: MSCI, IBES, Bloomberg, J.P. Morgan, 5 November 2010. Note: Outperformance of more than 2% vs. MSCI EM. Underperformance of more than 2% vs MSCI EM. DD=Domestic Demand, GPT=Global Price Takers, GC/C=Global Capex/Consumer, GC=Global Consumer, GCap=Global Capex.
23
Ben Laidler (1-212) 622-5252
[email protected]
Latin America Equity Research November 2010
Potential Returns and Earnings Estimates End-2011 strategy team index forecasts • MSCI EM 1500 (+25%) Base case • Current MSCI EM forward PE 11.6 • 2012 MSCI EM EPS 112 (before currency appreciation) • EM FX appreciation 5% • 10% re-rating to forward PE 13 Statistical warning EM equity markets’ valuations trend rather than meanrevert. Indices also evolve with sector composition changing. The growth characteristics of stocks also change and thus their valuations. Prior to the mid-90s current account crisis, fixed exchange rates and high nominal growth supported high valuations. Investors should be suspicious of statistical justification for index targets. Pick your methodology To illustrate the impact of different methodologies on potential returns we calculate index targets using six assumptions: 1.
Current earnings to bond yield ratio using September 2011 yield forecast and end-2011e PE.
5. Five-year average earnings to bond yield ratio using September 2011 yield forecast and end-2011e PE. 6. Current forward PE multiplied by 2012e EPS based on the lower of 2012e EPS growth or potential nominal GDP. 7. Current forward PE multiplied by 2012 EPS forecast. 8. Three-year average PE multiplied by 2012 EPS forecast. 9. Gordon Growth model theoretical PE multiplied by 2012e EPS. This generates PE in excess of 30 for six markets as local bond yields in these countries are very low relative to nominal GDP growth and RoE.
24
Current forward PE with standard deviation ranges Index EM EM Asia Latam EMEA China India Indonesia Korea Malaysia Philippines Taiwan Thailand Brazil Mexico Chile S Africa Russia Turkey
Current Fwd PE 11.7 12.7 11.8 9.3 13.0 17.2 14.9 9.9 15.0 16.6 12.8 12.3 10.5 15.1 17.4 11.7 6.4 11.2
Avg 10Y 10.7 11.5 10.0 9.8 13.1 14.1 9.6 9.1 14.1 13.9 14.3 10.4 8.0 12.1 15.6 10.0 7.9 9.1
+1 SD
-1 SD
12.2 13.3 11.7 11.4 16.3 17.3 12.9 10.9 15.5 16.1 18.0 11.8 10.4 13.8 17.6 11.4 10.3 11.2
9.2 9.7 8.4 8.2 9.8 10.8 6.2 7.2 12.7 11.7 10.6 9.0 5.6 10.4 13.5 8.7 5.6 7.1
Top Decile 12.6 14.0 12.3 11.7 17.3 18.0 13.7 11.6 15.9 17.1 20.4 12.1 11.7 14.1 18.2 11.7 11.1 11.7
Bottom Decile 8.8 9.3 8.0 8.0 9.9 9.9 5.0 6.5 12.3 11.5 11.4 8.9 5.3 9.8 12.8 8.1 4.6 6.5
Source: MSCI, IBES, Datastream, 5 November 2010. Note: Current PE > +1SD in red.
Consensus Earnings Growth Forecast (%) Index EM Brazil Chile China Czech Republic Hungary India Indonesia Korea Malaysia Mexico Peru Philippines Poland Russia South Africa Taiwan Thailand Turkey
Consensus Earning Growth (%) 10E 11E 12E 30.6 17.2 14.0 18.4 21.0 11.0 23.1 12.0 11.0 26.7 14.9 16.4 (4.8) 3.3 5.7 (2.9) 29.8 21.9 23.4 22.7 17.6 20.3 20.9 13.5 51.4 13.1 11.1 29.4 15.7 11.2 2.9 28.9 13.1 27.3 31.6 13.1 22.2 12.2 14.8 23.9 16.9 9.3 29.8 15.4 17.1 26.5 27.1 17.8 89.1 9.4 11.2 19.1 18.7 15.9 18.5 8.2 13.6
Source: MSCI, Datastream, IBES, J. P. Morgan, 5 November 2010.
EPS growth CAGR 11/ 06 8.2 9.0 18.3 14.3 9.1 (4.9) 10.6 18.3 8.6 7.8 5.7 8.4 4.4 1.1 6.8 9.0 5.4 7.2 12.9
Ben Laidler (1-212) 622-5252
[email protected]
Latin America Equity Research November 2010
Pick your methodology and thus your return: Percentage return to end-2011 targets based on multiple methodologies
Brazil Chile China India Indonesia Korea Malaysia Mexico Philippines Poland Russia South Africa Taiwan Thailand Turkey
Index Level
(1) Current EY/BY
(2) 5yr avg EY/BY
249321 5942 73 839 4672 543 558 33913 774 1904 815 808 301 425 1038342
14 13 15 25 10 4 14 18 29 12 20 16 6 8 15
0 31 5 2 27 20 8 10 41 6 85 9 63 15 59
(3) FWD PE 2010 EPS = GDP 7 6 11 12 8 5 8 6 7 6 7 7 6 7 7
(4) Current FWD PE 14 13 18 29 14 11 14 18 20 12 20 22 14 24 15
(5) 3year average FWD PE 11 (1) 15 8 (7) 7 3 (6) (5) 2 42 (1) 42 (12) (15)
Median
Max
Min
Range of returns
11 13 15 12 10 7 8 10 20 6 20 9 14 8 15
14 31 18 29 27 20 14 18 41 12 85 22 63 24 59
0 (1) 5 2 (7) 4 3 (6) (5) 2 7 (1) 6 (12) (15)
14 33 12 27 34 16 11 24 47 10 79 23 57 36 74
(6) Gordon Growth PE (38) (21) 169 110 127 153 123 (2) 115 39 486 17 172 165 51
Source: MSCI, IBES, Datastream, Bloomberg, J.P. Morgan. 5 November 2010 Note: All returns are local currency; please email
[email protected] for the assumptions.
Consensus EPS estimates and revisions since the beginning of 2010 Index EM Brazil Chile China Czech Hungary India Indonesia Israel Korea Malaysia Mexico Peru Phi Poland Russia S Africa Taiwan Thailand Turkey
Actual 08 58 15593 236 3.31 34.7 170 29 213 18 22 31 1446 63 30 148 111 57 7.0 19 70564
09 65 16618 247 3.76 34.7 106 34 224 21 35 25 1713 71 34 109 91 42 11 24 72915
Current Consensus EPS 10E 11E 12E 84 98 112 19678 23812 26435 303 339 376 4.79 5.51 6.41 33.0 34.1 36.0 103 134 163 42 51 60 269 325 369 27 31 37 49 55 61 32 37 41 1763 2272 2588 90 119 135 42 47 54 136 159 173 118 136 159 52 66 78 21 23 26 28 33 39 86436 93550 106291
Consensus EPS beginning of this Year 10E 11E 12E 77 93 104 17942 21381 25574 276 317 381 4.64 5.39 6.03 33.8 36.0 37.2 116 150 171 42 50 61 261 309 369 28 33 34 47 52 55 30 35 39 2063 2440 2834 89 102 111 41 46 70 116 144 158 98 144 151 56 71 85 17 22 24 27 31 35 78669 93247 108651
Revision in Consensus EPS (%) 10E 11E 12E 9.3 6.0 7.5 9.7 11.4 3.4 9.5 6.9 (1.2) 3.3 2.1 6.2 (2.4) (5.2) (3.1) (11.1) (11.1) (4.4) (0.5) 2.3 (1.1) 3.1 5.4 (0.0) (4.7) (4.5) 8.5 5.0 6.5 11.6 5.3 6.6 5.4 (14.6) (6.9) (8.7) 1.5 16.6 20.8 2.5 1.1 (22.6) 16.5 9.9 10.1 19.8 (5.8) 5.4 (6.6) (6.9) (8.0) 23.2 8.1 10.6 5.3 6.2 11.2 9.9 0.3 (2.2)
Source: MSCI, Datastream, IBES, J. P. Morgan, 5 November 2010.
25
Ben Laidler (1-212) 622-5252
[email protected]
Latin America Equity Research November 2010
to losses or low profits at AU Optronics, Chimei Innolux, Chunghwa picture tubes, E-Ink). The median EPS growth is 24% (see second table on next page).
Dissection of EM EPS growth The objective Disaggregate the EM EPS growth into countries, sectors and key sectors in countries. Main observations on 2011e EPS growth • MSCI EM weighted and median EPS growth is 17%. This is 5% higher than our economists’ 2011 nominal GDP growth forecast of 12%. •
Financials and materials are the highest contributors to 2011e earnings growth.
•
The contribution of IT and healthcare is the lowest (see top table, next page).
•
Two sectors contribute c20% of MSCI EM 2011e EPS growth; Brazilian steel and Russian oil & gas sectors (2011e EPS growth for Vale, Sider and Gazprom is estimated by IBES to be 41%, 44% and 23% respectively).
•
Note that the weighted EPS growth for Taiwan electronic components is high at 62% (primarily due
Dataset IBES EPS forecasts for MSCI EM constituents Calculation The index’s calendar year EPS is calculated using the profit-weight of the constituents. Index EPS = I x (∑ (C-EPS x FFS) / ∑ (FFS x P)) where C-EPS = Index constiuent’s EPS, FFS = free float shares for the constituents, I = index level and P = current market price. The check Median EPS growth of the index constituents: Reviewing the median helps identify sectors in which a single stock’s impact on weighted EPS growth is large. This could be due its large weight in the index or moving from loss to profit.
Emerging markets earning growth and contribution Country Brazil Russia China South Africa Korea India Taiwan Mexico Indonesia Malaysia Thailand Poland Chile Peru Colombia Turkey Hungary Egypt Philippines Czech Republic Morocco
Mkt Cap Weight 16.2 6.0 18.7 7.4 13.2 8.1 10.5 4.4 2.3 2.8 1.8 1.6 1.7 0.8 0.9 1.9 0.4 0.4 0.5 0.4 0.2
Earnings weights (%) 2010E 2011E 2012E 16.4 16.9 16.6 11.2 12.4 12.4 17.0 16.7 17.1 6.9 7.4 7.6 17.6 16.2 15.7 5.3 5.5 5.8 10.3 9.6 9.5 3.1 3.4 3.4 1.8 1.9 1.8 2.2 2.2 2.1 1.6 1.6 1.6 1.5 1.5 1.5 1.2 1.2 1.1 0.5 0.6 0.5 0.4 0.5 0.5 2.2 2.0 2.0 0.4 0.5 0.5 0.5 0.5 0.6 0.4 0.3 0.3 0.5 0.4 0.4 0.1 0.1 0.1
Index EPS Growth 2010E 2011E 2012E 18.4 21.0 11.0 29.8 15.4 17.1 26.7 14.9 16.4 26.5 27.1 17.8 51.4 13.1 11.1 23.4 22.7 17.6 89.1 9.4 11.2 2.9 28.9 13.1 20.3 20.9 13.5 29.4 15.7 11.2 19.1 18.7 15.9 23.9 16.9 9.3 23.1 12.0 11.0 27.3 31.6 13.1 29.4 52.5 5.0 18.5 8.2 13.6 (2.9) 29.8 21.9 32.7 19.6 42.9 22.2 12.2 14.8 (4.8) 3.3 5.7 4.1 10.7 9.2
Source: IBES, Datastream, J.P. Morgan calculations. Note: Sorted by 2011e earning growth contribution.
26
Median EPS Growth 2010E 2011E 2012E 18.4 24.1 19.0 33.4 34.5 15.4 25.0 21.1 18.8 14.4 19.4 18.3 31.8 14.3 12.9 12.9 19.3 20.2 25.3 13.3 10.0 15.6 17.2 12.4 18.7 20.4 12.0 19.7 12.5 10.0 15.5 19.9 15.7 15.0 20.5 13.8 33.8 16.5 8.9 23.4 34.8 18.1 30.4 33.3 25.0 13.5 8.7 14.2 (0.9) 20.3 10.0 34.9 17.5 19.4 20.7 14.3 12.5 (7.8) 5.0 7.7 (0.4) 12.7 13.0
Contribution to Earning growth (%) 2010E 2011E 2012E 9 20 15 13 20 13 15 15 20 6 10 9 24 8 13 4 7 8 20 6 8 0 5 4 1 2 2 2 2 2 1 2 2 1 2 1 1 1 0 0 1 1 0 1 0 1 1 2 0 1 1 1 1 1 0 0 0 0 0 0 0 0 0
Ben Laidler (1-212) 622-5252
[email protected]
Latin America Equity Research November 2010
EM Sectors’ earning growth and contribution EM Sectors Financials Materials Energy Utilities Consumer Discretionary Telecommunication Services Industrials Consumer Staples Information Technology Health Care EM
Mkt Cap Weight 26.3 14.6 14.3 3.4 6.8 7.8 7.3 6.7 11.9 0.8 100
Earnings weights (%) 2010 2011 2012 24.1 25.2 25.9 13.8 15.3 15.2 19.9 19.3 18.8 2.8 3.5 3.3 6.4 6.4 6.5 8.3 7.9 7.7 6.6 6.4 6.4 4.4 4.2 4.2 13.6 11.9 11.9 0.5 0.5 0.5 100.0 100.0 100.0
Index EPS Growth 2010 2011 2012 25.1 22.2 16.8 63.7 31.0 16.4 11.8 10.2 9.0 7.4 26.5 14.2 28.6 15.5 13.7 7.4 10.7 10.7 47.5 13.9 15.4 18.1 11.4 16.1 118.5 7.6 13.2 32.7 15.6 13.8 30.6 17.2 14.0
Median EPS Growth 2010 2011 2012 20.7 19.4 16.1 31.0 23.7 15.5 21.5 15.5 14.0 1.9 13.2 9.0 19.5 17.2 16.1 7.0 6.7 9.1 20.7 15.2 16.8 18.1 17.2 14.3 33.3 15.4 12.4 14.3 17.6 19.9 19.9 17.5 14.8
Contribution to Earning growth (%) 2010 2011 2012 19 31 31 21 24 14 13 15 16 -1 7 2 6 6 7 3 5 6 9 5 6 3 3 4 27 3 11 0 0 1 100 100 100
Source: IBES, Datastream, J.P. Morgan calculation. Note: Sorted by 2011e earnings growth contribution.
Countries’ sub-industry contributing 70% of EM earning growth Country Sub-Industry
Mkt Cap
Brazil Steel Russia Integrated Oil & Gas China Diversified Banks Russia Diversified Banks Brazil Diversified Banks Korea Diversified Banks South Africa Gold Taiwan Electronic Components Korea Electric Utilities Russia Div. Metals & Mining Brazil Homebuilding Mexico Wireless Telecom Mexico Construction Materials S Africa Wireless Telecom Russia Oil & Gas E&P China Life & Health Insurance Taiwan Electronic Mftg Services South Africa Diversified Banks Taiwan Diversified Banks S Africa Precious Metals India Diversified Banks India Steel China Real Estate Development Russia Steel South Africa Int Oil & Gas China Oil & Gas E&P Korea Construction & Eng. Poland Diversified Banks India It Consulting & Other svs Mexico Div Metals & Mining Indonesia Coal & Consumable India Oil & Gas R&M Korea Steel Thailand Diversified Banks Korea Auto Manufacturers Colombia Diversified Banks China Coal & Consumable Fuels Russia Wireless Telecom Taiwan Communications Equip Brazil Packaged Foods & Meats
Weight 3.8 2.9 4.5 1.0 3.7 1.2 0.9 0.9 0.2 0.4 0.5 1.5 0.2 0.9 0.4 1.6 0.9 0.7 0.8 0.6 1.3 0.5 0.9 0.3 0.7 1.2 0.6 0.7 1.3 0.3 0.3 0.9 0.9 0.6 1.0 0.2 0.9 0.4 0.5 0.3
Earnings weights (%) 2010 4.6 7.4 5.1 0.8 3.6 1.5 0.5 0.6 (0.1) 0.4 0.7 1.5 (0.2) 1.0 0.9 0.8 0.8 0.8 0.7 0.4 0.7 0.5 0.9 0.2 0.9 1.1 0.5 0.5 0.7 0.3 0.2 0.7 1.4 0.6 1.4 0.2 0.8 0.4 0.4 0.2
2011 5.6 7.3 5.1 1.3 3.6 1.9 0.7 0.8 0.2 0.6 0.8 1.5 0.0 1.0 0.9 0.8 0.9 0.9 0.8 0.5 0.7 0.5 0.9 0.3 0.9 1.1 0.5 0.5 0.7 0.4 0.3 0.7 1.3 0.6 1.3 0.2 0.7 0.4 0.4 0.2
2012 5.5 7.2 5.4 1.3 3.7 1.9 0.7 0.9 0.3 1.0 0.9 1.4 0.0 1.0 0.9 0.9 0.9 0.9 0.7 0.5 0.8 0.6 0.9 0.4 0.9 1.0 0.6 0.6 0.8 0.4 0.3 0.7 1.2 0.6 1.2 0.2 0.7 0.5 0.4 0.3
Index EPS Growth 2010 107 24.6 22.1 456 17.8 77.8 (377) (202) 623 NA 52.1 18.0 (194) 23.2 8.7 9.8 27.5 14.4 63.4 43.1 18.4 56.3 18.9 (571) 15.4 71.9 67.9 24.0 12.3 52.8 20.0 16.9 24.3 19.9 55.1 36.9 35.0 132.6 66.7 81.9
2011 42.0 15.6 17.5 95.0 19.1 43.6 82.8 61.0 (437) 84.6 37.8 14.3 (120) 20.0 21.1 24.2 21.8 21.9 25.0 48.3 23.0 33.3 17.2 61.7 17.2 12.8 28.8 29.0 19.1 45.5 58.0 19.0 9.1 21.0 8.7 66.3 14.5 27.5 29.0 61.5
2012 11.7 13.2 20.2 15.4 15.0 16.8 6.1 36.7 40.7 84.7 22.6 12.5 100.0 13.0 7.6 24.1 18.8 23.0 2.2 22.1 23.6 19.9 25.6 29.2 20.5 6.4 16.1 19.4 19.8 18.8 1.9 14.0 9.2 14.5 7.3 (8.2) 13.7 20.0 11.9 35.9
Median EPS Growth 2010 47.7 17.4 25.0 456 23.8 65.2 (3.7) 46.4 NM NM 64.6 18.0 NM 23.3 8.7 13.6 4.2 11.0 34.0 16.7 19.7 11.7 22.8 504 15.4 74.1 29.9 25.8 11.2 52.8 (10.3) 22.2 34.3 19.9 50.5 36.9 45.1 25.0 19.2 223.1
2011 41.1 4.1 17.4 95.0 17.1 15.0 79.1 24.2 NM 84.6 35.2 14.3 NM 15.8 21.1 25.4 18.5 20.2 25.0 41.2 22.9 20.0 19.4 55.5 17.2 22.5 13.8 28.2 18.5 45.5 52.3 17.4 7.0 25.9 9.7 66.3 13.7 35.6 47.7 46.2
2012 13.9 11.5 17.8 15.4 14.9 11.8 17.8 13.7 40.7 84.7 23.8 12.5 100.0 9.0 7.6 24.7 18.8 24.2 0.0 26.3 23.7 21.9 24.3 29.3 20.5 15.1 18.1 18.5 20.7 18.8 1.2 10.5 8.3 14.7 7.0 (8.2) 11.8 29.3 (13.8) 41.4
Contribution to Earning growth (%) 2010 2011 2012 10 11 5 6 7 7 4 5 7 3 4 1 2 4 4 3 4 2 3 2 0 4 2 2 (0) 2 1 0 2 4 1 1 1 1 1 1 (1) 1 0 1 1 1 0 1 0 0 1 1 1 1 1 0 1 1 1 1 0 0 1 1 0 1 1 1 1 1 1 1 2 1 1 1 0 1 1 2 1 0 1 1 1 0 1 1 0 1 1 0 1 0 0 1 0 0 1 1 1 1 1 0 1 1 2 1 1 0 1 (0) 1 1 1 1 1 1 1 1 0 0 1 1
Source: IBES, Datastream, J.P. Morgan calculation. Note: Sorted by 2011 earning growth contribution.
27
Ben Laidler (1-212) 622-5252
[email protected]
Latin America Equity Research November 2010
Risks to our strategy Market risks Lack of valuation cushion Our strategy is biased toward growth with good momentum but at a valuation premium. A growth premium is justified in a world where growth is in short supply. High valuations are vulnerable to a reversal in EM portfolio flows and stock-specific risk. Bond market volatility The Fed’s objective with QE2 is to lower bond yields. The result is that bonds are expensive relative to J.P. Morgan’s growth forecasts. Higher US growth could lead to a spike in bond yields.
Politics: Elections and change of leadership in Brazil and China Leadership change in China will occur in 2012. The transition may result in confusion on policy. Brazil’s new president needs to maintain reform momentum and develop infrastructure. 2011 election calendar Jan
Feb
Mar
May
Jun Vietnam Presidential
Jul
Sep
High correlation High correlation between risk assets may propagate volatility. A counter-trend rally in the US dollar may drive that volatility.
Turkey Parliamentary Oct Argentina Presidential Poland Parliamentary
Policy and Political risks
Source: IFES.
Capital controls Strong foreign inflows and continued FX appreciation have prompted EM central banks to implement capital control measures. These include: 1) Increase in IOF tax on foreign purchase of fixed income instruments from 2% to 6% in Brazil; 2) One-month minimum holding period restriction on SBI bonds in Indonesia; 3) 15% withholding tax on foreign bond holders in Thailand; 4) Restrictions on forward currency positions of foreign bank branches and local banks in South Korea. For equity investors, controls designed to reduce the effective carry in fixed income markets are ok. Broader capital controls which reduce the ability of equity investors to buy and sell would be negative as they reduce liquidity and increase volatility.
EM CPI and earnings yield
Anti-asset inflation policies Central banks are targeting asset prices in EM to counter asset inflation. These policies introduce economic and sector-specific risks. Note how poorly real estate stocks have performed in EM despite low interest rates. Trade wars High US unemployment, China’s large current account surplus and polarized politics in the US increase the risk of a trade war.
28
Nov
Apr Peru Presidential & Legislative Aug Philippines Subnational Legislative Dec Russia Parliamentary Thailand Parliamentary (Tentative)
12 MSCI EM 12m Fw d PE EM CPI %oy a 11 (RHS inv erted) 10 (LHS) EM central banks' 9 av erage target range ceiling 8 7 6 5 4 3 Jan-02 Jun-03 Nov -04 Apr-06 Sep-07 Feb-09 Jul-10
3 6 9 12 15
Source: J.P. Morgan economics, IBES, MSCI, November 2010. Note: CPI data is to August 2010.
Strained social contract Political and regulatory risk is high. The corporate sector has emerged from the global recession and credit crunch stronger than the households. Note that profits as a share of GDP are near cyclical highs but unemployment is 10%. Policy makers constrained by high fiscal deficits are likely to redress this imbalance through higher taxes and increased regulation. This would add to business costs and delay normal investment decisions, threatening the recovery.
Ben Laidler (1-212) 622-5252
[email protected]
Latin America Equity Research November 2010
As is the case in the US, Chinese corporate share of GDP increased while the household share decreased. Labor disputes and subsequent large pay increases may start to reverse this trend. This rebalancing is healthy and should move China to a more sustainable growth model. But near term the result is likely lower profit margins.
Strained social contract: US profit share and unemployment 22
% sa
Profit share
3
18 16
6
14
Economic risks Uncertain outlook for commodities Our commodities and energy underweight is driven by a combination of long-term economic cycles and a potential inflection point in the growth of Chinese material demand. The timing is complicated by the large influence of financial investors on commodity markets. The timing risk in a bearish view on commodity companies is high. Industrial metal prices rallied since May while global leading indicators fell. Correlation of commodities to risk assets (equities) is high today. Momentum in a world of zero interest rates is an attractive attribute. An UW commodity call is unlikely to work at this point. When it does eventually, the correction may prove to be violent as financial investors exit.
0
20
12
9
Unemploy ment rate (inv erted)
10 8
12 70
75
80
85
90
95
00
05
10
Source: J.P. Morgan. Note: Chart shows % share of gross value added, J.P. Morgan forecast for 2010.
Shares outstanding in commodity ETF 210000 180000 150000 120000 90000 60000
Unintended consequences of QE2 If QE2 results in a sharp increase in commodity prices it may choke off growth and ultimately be counterproductive. Peripheral Europe sovereign stress Greek, Irish and Portuguese bond spreads to German bunds are at record highs. Sovereign stress could disrupt risk appetite as it did in 2Q10. US state and municipal stress US states and municipalities are required to balance their budgets. The result may be rising unemployment as US local government downsizes. This would place a larger burden on the private sector to create jobs.
30000 Dec-07 May -08 Oct-08 Mar-09 Aug-09 Jan-10 Jun-10 Nov -10 Source: Bloomberg, DBCSO Index.
Peripheral stress in Europe 7
10 Greece (RHS)
6
8
5 4
6
Ireland (LHS)
3
4
2
2
1 0 Jan 08
0 Jul 08
Jan 09
Jul 09
Jan 10
Jul 10
Source: Bloomberg Note: Spread of Greek and Irish 10-year bond yields to German bunds.
29
Latin America Equity Research November 2010
30
1Q-04
1Q-05
1Q-06 GDP
1Q-07
1Q-08
1Q-09
1Q-10
Household Consumption
Source: IBGE.
Unemployment rate (%) 11 10 9 8 7 Jul-10
Jan-10
Jul-09
Jan-09
Jul-08
Jan-08
Jul-07
Jan-07
6
Source: IBGE.
BRL (rh, inverted scale) versus BZ Commodity Export Index (lh) 500
1.5 1.6 1.7 1.8 1.9 2.0 2.1 2.2 2.3 2.4 2.5
450 BRL
400 350 300 BZ Commodity Index
250 200 150 2/4/05
9/2/05
3/31/06 10/27/06 5/25/07 12/21/07 7/18/08 2/13/09 9/11/09
4/9/10
Source: Bloomberg; J.P. Morgan.
Foreign Net Inflows into Brazilian Equities (secondary) R$bi 5
4.04
4 3
2.21
2
1.65
YTD 2010 = R$4.7 bi YTD 2009 = R$19.2 bi 3.15 1.14 0.93
1
3.51
3.14 1.60
0.51
0 -0.15
-1
Oct-10
Sep-10
Aug-10
Jul-10
Apr-10
Mar-10
Dec-09
Nov-09
Oct-09
Source: BM&FBovespa; Bloomberg.
Jan-10
-2.10
-3
-0.60
-1.51 Jun-10
-1.08
-1.25
May-10
-1.09
Feb-10
-2
Sep-09
Recommendations We recommend exposure to domestic names and are focused on financials and homebuilders. Although we like discretionary, we feel that there are better entry points considering the strong performance of late. In financials, Bradesco is our top pick, a blue chip, large cap bank that can better withstand the rise in interest rates as about 30% of its business is insurance. In homebuilders, we like PDG: the stock is cheaper than peers’, benefits from the Agre acquisition are not fully priced, the company is fully exposed to the high-growth lower-income segment. On the commodity side, we likeVale: it is cheap, with risks mostly priced in already, while China appears to be rebounding. In the oil and gas sector, we recommend OGX as the better vehicle to get exposure to offshore as more of the company’s findings are turning into reserves.
8.0% 7.0% 6.0% 5.0% 4.0% 3.0% 2.0% 1.0% 0.0% -1.0% 1Q-03
Jul-06
Drivers of returns – Multiples and growth Valuation is not an impediment to Brazil’s performance. The country is trading in line with the five-year average, with commodities cheaper than domestics but with the latter likely delivering more growth in the short/medium run. Flows are key for performance and are catching up in 4Q 2010 after being lackluster most of the year. With major hurdles behind (large capitalizations, elections) and DM prospects of a muddle-through, inflows into Brazilian equities are likely to be boosted in 2011.
Household consumption rising above GDP (4Q/4Q rolling average)
Jul-09
Growth characteristics and how they are changing Credit growth at around 20% combined with the best labor market in a generation provides for a sturdy outlook for consumption in 2011. We forecast GDP of 4.5% in 2011, on top of 7.5% in 2010e. Strong growth is adding to inflation risks, and we expect a rise in interest rates in 2011. Although GDP is little influenced by commodities (exports = 11%), Brazil’s two largest companies are commodity driven. Over the next few years, investment (under 18% of GDP) will need to rise to meet the country’s need for more capacity and infrastructure. This would also allow for faster sustainable growth in the years to come.
Bloomberg JPMA SHAYO <GO>
Aug-09
Key country dynamics Domestic growth and China’s demand for commodities are the main drivers for Brazil in 2011, together with a clearer definition of policies to be adopted by the newly elected government. The exchange rate is an important focus, with capital control risks on the rise.
(5511) 3048-6684
[email protected] Banco J.P. Morgan S.A.
Jan-06
Brazil Strategy
Emy Shayo Cherman AC
Jun-09
Ben Laidler (1-212) 622-5252
[email protected]
Ben Laidler (1-212) 622-5252
[email protected]
Latin America Equity Research November 2010
Top picks and stocks to avoid Price Top picks Bradesco PDG Realty VALE OGX Stocks to avoid Usiminas Eletropaulo Tele Norte Leste
Code
Rating
Mkt cap (US$MM)
P/E (x) 10E
EPS 10E
11E
11E
Div. yield 11E (%)
ROE 11E (%)
34.8 10.6
BBDC4 PDGR3
OW OW
73,018 7,144
13.5 14.5
12.1 9.4
2.59 0.73
2.88 1.13
2.9% 1.7%
21.2% 19.2%
31.8 21.7
VALE OGXP3
OW OW
173,421 42,952
10.9 nm
7.7 nm
2.92 0.06
4.13 0.02
2.9% 0.0%
23.3% 0.6%
21.0 29.9 48.5
USIM5 ELPL6 TMAR5
UW UW N
14,775 3,229 7,699
20.5 4.8 nm
11.1 8.4 nm
1.02 6.29 8.60
1.88 3.54 7.21
3.1% 13.8% 8.9%
8.8% 18.0% 14.9%
Source: Bloomberg, J.P. Morgan estimates. Note: Share prices and valuations are as of October 28, 2010.
MSCI Brazil absolute and Relative to EMF Index 1400
MSCI fair value range
Absolute
Relativ e to MSCI EMF Index
FWD PE
1200
PE
1000
(211296)
(135082)
(339385)
(119256)
PB (89127)
800 600
DY
400
BY/EY
200
(277670)
(124074)
(273109)
(445307)
(212792) (196127)
BY/DY
(326196)
0 Dec-02
Mar-04
May -05
Aug-06
Oct-07
Jan-09
50000
Mar-10
150000
250000
Source: MSCI, Datastream.
Source: MSCI, IBES, Datastream, J.P. Morgan.
Currency outlook (BRL/USD)
MSCI EPS integer over time
3.0 2.8 2.6
J.P. Morgan forecast:
450000
150
end Dec 10: 1.70
140
end Mar 11 : 1.80 end Jun 11: 1.82
2011
130
2.4
120
2.2
J.P. Morgan
2.0
2010
110 100
1.8 1.6
Consensus
90 80
1.4 Dec 04
350000
Apr 06
Source: Bloomberg, J.P. Morgan.
Jul 07
Nov 08
Feb 10
Jun 11
Feb-09
Jul-09
Dec-09
May -10
Oct-10
Source: MSCI, Datastream.
31
Ben Laidler (1-212) 622-5252
[email protected]
Latin America Equity Research November 2010
Mexico Strategy Key country dynamics The key constraints on Mexican equities are structurally lower US GDP growth and a lackluster Mexican consumer rebound. This is offset by a cheap currency, easy monetary policy, a gradual reacceleration of US economic growth – at least into mid-2011 – and a high market correlation with US equities. Additionally, we view some concerns as currently overdone – such as the fiscal situation (oil production has stabilized) and security environment (violence localized) – whilst others are not – such as Mexico’s declining equity market relevance on lack of issuance. Growth characteristics and how they are changing Mexican GDP growth is set to slow next year (to 3.5% from an estimated 4.5% in 2010), along with the US (2.7% GDP growth to 2.5% in 2011e). Manufacturing and IP, which led the sharp growth recovery from the -6.5% seen in 2009, should slow and domestic demand increasingly come to the fore. Consensus MSCI Mexico earnings growth could be at risk, with expectations for 18% growth versus only 12% this year. Growth is expected to be led by staples and materials.
Ben Laidler AC (1-212) 622-5252
[email protected] J.P. Morgan Securities LLC Bloomberg JPMA LAIDLER <GO>
Contributions to GDP growth, 2008-2011e
Source: J.P. Morgan Economics.
Mexico 12 mth fwd PE 17.00 15.00 13.00 11.00 9.00 7.00 95 97 98 99 00 01 02 03 04 05 06 07 08 10 Mex ico
Av erage
+1SD
Source: MSCI, IBES, Datatsream.
Drivers of returns – Multiples and growth Mexico is trading at the high end of traditional valuation ranges, and we do not see room for significant multiple expansion. The valuation premiums to other markets are lower than they seem, often just reflecting Mexico’s high staples and telecom index composition. Whilst the traditional drivers of Mexican outperformance – 1) significant market weakness, 2) strong US macro surprise, 3) strong Mexico consumer recovery – look absent to us in 2011, we do expect respectable absolute performance. Local investors remain underweight the market and are seeing robust inflows. Foreign investors remain moderately overweight. Recommendations Our strategy focus is on stocks exposed to the strengthening domestic demand environment at reasonable valuations. We also like a number of special situations exposed to recovering infrastructure segments. We would avoid very defensive staples with high valuations and low gearing to the strengthening consumer.
32
Mexico consumer confidence and formal employment
Source: J.P. Morgan Economics, INEGI, IMSS.
-1SD
Ben Laidler (1-212) 622-5252
[email protected]
Latin America Equity Research November 2010
Top picks and stocks to avoid Price Top picks America Movil Cemex Grupo Televisa ICA First Cash Financial Stocks to avoid Telmex Grupo Inbursa Consorcio Ara
Code
Rating
Mkt cap (US$MM)
P/E (x) 10E
EPS 10E
11E
Div. yield 11E (%)
11E
ROE 11E (%)
57.1 8.8 22.2 32.5 29.4
AMX CX TV ICA* FCFS
OW OW OW OW OW
119,244 9,800 13,699 1,781 913
15.8 nm 22.0 30.4 17.1
13.4 nm 17.2 22.0 14.6
44.98 -0.16 12.54 1.07 1.72
52.72 0.02 16.02 1.48 2.01
0.7% 0.0% 1.4% 0.0% 0.0%
26.1% 0.1% 23.0% 4.9% 17.9%
15.2 53.9 7.6
TMX GFINBURO ARA*
UW UW UW
14,410 14,247 829
12.7 25.3 11.5
13.2 21.0 9.9
18.51 2.13 0.66
17.30 2.57 0.77
5.0% 1.4% 1.3%
37.0% 12.2% 10.1%
Source: Bloomberg, J.P. Morgan estimates. Note: Share prices and valuations are as of October 28, 2010.
MSCI Mexico absolute and relative to EMF Index 500
Absolute
MSCI fair value range
Relativ e to MSCI EMF Index
450 400
FWD PER (17980) PER
350 300
(20184)
(25937)
(33101)
PBR
250 200
DY
150 100
BY/EY
(25349)
(41784)
(14776) (125613) (24866)
50 0 Dec-02
(22590)
(29973)
BY/DY
Mar-04
May -05
Aug-06
Oct-07
Jan-09
Mar-10
(196457) 0
50000
100000
Source: MSCI, Datastream.
Source: MSCI, IBES, Datastream, J.P. Morgan.
Currency outlook (MXN/USD)
MSCI EPS integer over time 105
16.0 end Dec 10: 12.50
14.0
end Mar 11: 12.50
J.P. Morgan
250000
100 95
end Jun 11: 12.25
13.0
90
12.0
2010
85
Consensus
11.0 10.0
80 75
9.0 Dec 04
200000
2011
J.P. Morgan forecast: 15.0
150000
70
Apr 06
Source: Bloomberg, J.P. Morgan.
Jul 07
Nov 08
Feb 10
Jun 11
Feb-09
Jul-09
Dec-09
May -10
Oct-10
Source: MSCI, Datastream.
33
Ben Laidler (1-212) 622-5252
[email protected]
Latin America Equity Research November 2010
Chile Strategy Key country dynamics Chile will look to build on the momentum of an historic 2010, which saw the inauguration of center-right Piñera (after 20 years of the center-left Concertacion), an 8.8magnitude earthquake (5th largest in history), World Cup success (advancing to the round of 16), the country’s 200-year anniversary and the unprecedented extraction of 33 miners trapped underground for 68 days. Confidence is running high, and the country appears to be entering a period of renewal, which could accelerate the path to developed country status (possibly by the end of the decade). However, with expectations mounting, there is room for disappointment, especially if social/political differences get in the way of progress. Growth characteristics and how they are changing For the first time in recent years, Chile is expected to lead regional growth in the coming year on the back of an aggressive Piñera pro-growth agenda, accelerated by ongoing earthquake reconstruction efforts. This should be further helped by supportive demand dynamics out of China and expansionary fiscal policies (benchmark rate not likely to surpass 4.25% – lowest YE11e level in the region), not to mention micro-level incentives for investment by both locals and foreigners. Drivers of returns – Multiples and growth The top-down scenario remains attractive, but valuations are lofty at nearly 18x forward P/E, representing a 50% premium to LatAm, which is just ahead of historical levels (despite recent factors that are working to close the spread – such as the move to IFRS and regional expansion). As the Chile premium suggests, performance is largely tied to supportive domestic flows (and limited foreign ownership). This support was strong in 2010 given weakness elsewhere. In the event that key markets, such as Brazil, China and the US, perform well in 2011 (especially relative to domestic fixed income), this will likely limit domestic flows, specifically from pension funds, which may be forced to trim domestic equity positions to remain within their limits. Recommendations Although we like the Chile growth profile, we focus on names that are expanding abroad (Falabella, CCU). We also find copper play Antofagasta at an attractive valuation with significant growth potential. We avoid utility IAM, given strong relative outperformance in the utilities sector and potential Aguas Andinas share sale overhang. We also see limited upside after the speculative rise in SQM’s share price.
34
Brian P. Chase AC 56 2 425 5245
[email protected] Inversiones y Asesorias Chase Manhattan Ltda. Bloomberg JPMA CHASE <GO>
Business and consumer confidence returning to historical highs
Bus Conf
65
Cons Conf
55 45 35 25 J-06
S-06
M-07
J-08
S-08
M-09
J-10
S-10
Source: Adimark and ICARE.
Chile GDP growth (oya) catching back up to EM standards
13%
EM
Chile
8% 3% -2% 85
87 89 91
93
95 97 99
01
03 05 07
09 11E
Source: World Bank and J.P. Morgan.
Chile fwd P/E premium to LatAm at historical levels
2.4 2.1 1.8 1.5 1.2 0.9 0.6 94 96 97 98 99 00 01 02 03 04 05 06 07 09 10 Source: Datastream and J.P. Morgan.
Chile fwd P/E premium to EM vs. AFP % ownership of free float (RHS)
2.5
Premium to EM
% of Free Float
2.0
40%
1.5
20%
1.0 0.5 Feb-97
60%
0% Jul-99
Dec-01
May -04
Source: Datastream, SAFP and J.P. Morgan.
Oct-06
Mar-09
Ben Laidler (1-212) 622-5252
[email protected]
Latin America Equity Research November 2010
Top picks and stocks to avoid Price
P/E (x) 10E
EPS 10E
Div. yield 11E (%)
ROE 11E (%)
Code
Rating
Mkt cap (US$MM)
N OW OW
24,106 3,647 22,744
38.5 15.1 16.5
31.4 13.7 11.4
125.92 3.70 80.30
154.40 4.08 116.50
0.8 4.5 0.5
13.0 21.6 116.5
N N
15,735 13,873
1,558 43.6
16.1 30.4
16.1 1.18
46.36 1.69
46.36 0.0
5.9 24.6
Top picks Falabella CCU Antofagasta Minerals
4849.5 56.1 1326.0
FALAB CCU ANTO
Stocks to avoid IAM SQM
747.0 51.5
IAM SQM
11E
11E
Source: Bloomberg, J.P. Morgan estimates. Note: Share prices and valuations are as of October 28, 2010.
MSCI Chile absolute and relative to EMF Index 700
Absolute
MSCI fair value range
Relativ e to MSCI EMF Index
(4068)
PER
500
(2906)
PBR
400 300
DY
200
BY/EY
100
(5772)
(4293)
FWD PER
600
(6797)
(4723)
(2181)
(3979)
BY/DY
0 Dec-02
Mar-04
May -05
Aug-06
Oct-07
Jan-09
1000
Mar-10
2000
3000
4000
Source: MSCI, Datastream.
Source: MSCI, IBES, Datastream, J.P. Morgan.
Currency outlook (CLP/USD)
MSCI EPS integer over time
800 750 700
J.P. Morgan forecast:
6000
7000
135
end Dec 10: 480 125
end Mar 11: 505 end Jun 11: 500
2011
115
650 600
Consensus
550
105 95
2010
500 85
450
75
400 Dec 04
5000
Apr 06
Source: Bloomberg, J.P. Morgan.
Jul 07
Nov 08
Feb 10
Jun 11
Feb-09
Jul-09
Dec-09
May -10
Oct-10
Source: MSCI, Datastream.
35
Ben Laidler (1-212) 622-5252
[email protected]
Latin America Equity Research November 2010
Colombia Strategy Key country dynamics The long-term structural rerating story continues in 2011 with the implementation of a new pension multifund system and potential advancements in tax/fiscal reform, which will likely result in investment grade. This should continue to drive investment growth in the country. We are also likely to see improvements on the trade front, including restored relations with Venezuela and numerous pending trade agreements. With key FARC leaders out of the picture, Colombia will move a step closer to peace, which could yield additional dividends. We see the key risk as reform watered down in order to maintain political consensus. Growth characteristics and how they are changing Despite the structural improvements and macro-level progress, which is boosting investment, Colombia still faces challenges in achieving its full growth potential (JPM 2011e GDP growth at just 4.1%), primarily on the private consumption side. We believe this represents an opportunity for the Santos Administration, but major progress will take time, requiring a combination of job creation and investment diversity initiatives (via payroll tax reform and education/innovation programs). We also see access to credit as a key theme, with current caps limiting expansion in the lower-income segments (as well as for SMEs). Drivers of returns – Multiples and growth Colombia shares a similar dynamic with Chile, as supportive domestic flows (and limited foreign ownership) help prop up valuations (current premium well ahead of historical averages). This is furthered by local accounting rules and complicated cross-holding structures, not to mention hidden assets. While growth fundamentals may not justify current valuations, we see flow support continuing in 2011 on the back of the multifund switch and Andean stock exchange integration, which should keep valuations riding high. Recommendations We focus on selective growth opportunities at reasonable valuations (Pacific Rubiales, Millicom) and second-tierliquidity stocks that have lagged this year (Exito) but could benefit from supportive domestic/regional flows. We avoid the large/liquid names that have led 2010 outperformance (Bancolombia, Ecopetrol), especially as flows may be redirected to second tier names and a series of new listings.
36
Brian P. Chase AC 56 2 425 5245
[email protected] Inversiones y Asesorias Chase Manhattan Ltda. Bloomberg JPMA CHASE <GO>
Investment growth driving internal demand recovery
Internal Demand Inv estment Consumption
30.0 20.0 10.0 0.0 -10.0 -20.0 1Q08
3Q08
1Q09
3Q09
1Q10
Source: BanRep.
Exports likely to continue their gradual recovery
100%
Import Grow th
Ex port Grow th
50% 0% -50% Jan-08
Jul-08
Jan-09
Jul-09
Jan-10
Jul-10
Source: BanRep.
Colombia fwd P/E premium to LatAm above historical averages
3.5 3.0 2.5 2.0 1.5 1.0 0.5 0.0 94 96 97 98 99 00 01 02 03 04 05 06 07 09 10 Source: Datastream, Superfinanciera and J.P. Morgan.
Pension fund equity exposure to rise on multifunds / demographics Estimated End-2010 AUM 1 0.0 2 90.6 3 0.0 Total 90.6
Equity 0.0 39.4 0.0 39.4
% NM 43.5% NM 43.5%
Limit 0.0 40.8 0.0 40.8
% 20.0% 45.0% 70.0% 45.0%
Cushion 0.0 (1.4) 0.0 (1.4)
% NM -1.5% NM -1.5%
Pro Forma 2011 AUM 1 4.5 2 53.4 3 32.6 Total 90.6
Equity 0.9 24.0 22.8 47.8
% 20.0% 45.0% 70.0% 52.8%
Limit 0.9 24.0 22.8 47.8
% 20.0% 45.0% 70.0% 52.8%
Cushion 0.0 0.0 0.0 0.0
% 0.0% 0.0% 0.0% 0.0%
Source: Superfinanciera and J.P. Morgan estimates.
Ben Laidler (1-212) 622-5252
[email protected]
Latin America Equity Research November 2010
Top picks and stocks to avoid Price
Code
Rating
Mkt cap (US$MM)
P/E (x) 10E
EPS 10E
11E
11E
Div. yield 11E (%)
ROE 11E (%)
Top picks Pacific Rubiales Almacenes Exito Millicom
31.7 23080.0 94.7
PRE EXITO MICC
OW N OW
9,070 4,520 10,460
35.2 55.5 14.2
13.0 42.8 11.8
0.90 415.58 6.69
2.43 539.80 8.00
0% 0% 7.3%
34.1% 4.3% 26.1%
Stocks to avoid Bancolombia Ecopetrol
66.0 4360.0
CIB ECOPETL
UW UW
13,419 102,932
20.0 22.1
17.9 14.9
3.30 197.47
3.68 292.19
1.8% 3.3%
18.4% 34.5%
Source: Bloomberg, J.P. Morgan estimates. Note: Share prices and valuations are as of October 28, 2010.
MSCI Colombia absolute and relative to EMF Index 2000
Absolute
MSCI fair value range
Relativ e to MSCI EMF Index
(536)
FWD PER
(2178)
1800 1600
1000 800
(2693)
(897)
PBR
(2725)
600 400
Mar-04
May -05
Aug-06
Oct-07
Jan-09
0
Mar-10
(3357)
(949)
DY
200 0 Dec-02
(1024)
PER
1400 1200
500
1000
1500
2000
2500
3000
3500
Source: MSCI, IBES, Datastream, J.P. Morgan.
Source: MSCI, Datastream.
Currency outlook (COP/USD)
MSCI EPS integer over time
3,000
J.P. Morgan forecast:
2,800
end Dec 10: 1800
2,600
end Jun 11: 1850
200 170
end Mar 11: 1830
2011
140
2,400 2,200
J.P. Morgan
110
2,000 80
1,800
Dec 04
2010
Consensus
1,600 Apr 06
Source: Bloomberg, J.P. Morgan.
Jul 07
Nov 08
Feb 10
50
Jun 11
Feb-09
Jul-09
Dec-09
May -10
Oct-10
Source: MSCI, Datastream.
37
Ben Laidler (1-212) 622-5252
[email protected]
Latin America Equity Research November 2010
Peru Strategy Key country dynamics 1H11 will be dominated by the run-up to April presidential elections. Although we saw political overhang in 1H10, it has since started to dissipate as leftist candidate Humala is running 4th. The three currently leading candidates are all center-right, suggesting that it is unlikely we will see any meaningful changes to Peru’s market-oriented macroeconomic policy. We believe this will help cement the current economic consensus in the country. However, given Peru’s history of surprises on election day, we don’t rule out intensified noise and/or a renewed overhang leading up to the elections, especially considering that most polls don’t include rural areas, which tend to favor Humala. In addition, the emergence of Keiko Fujimori as the leading contender could reignite some historical social/political polemics.
Brian P. Chase AC 56 2 425 5245
[email protected] Inversiones y Asesorias Chase Manhattan Ltda. Bloomberg JPMA CHASE <GO>
Poll figures have not changed much in past 15 months
Fujimori
30%
Drivers of returns – Multiples and growth Valuation premiums are a bit ahead of historical levels. However, they are still lower than other Andean peers’, primarily due to commodity exposure and liquid gaps (index top and bottom heavy). We believe that scarcity value in the liquid names (BAP, BVN, SCCO) is relevant and if polling data continue to suggest political continuity, it is likely to boost these names and possibly widen the premiums. We also see Peru as a beneficiary of Andean stock exchange integration, as domestic investors in Chile and Colombia look to diversify away from their home markets. Recommendations We focus on playing continued strong domestic growth and potentially positive election results through the only liquid domestic proxy, leading bank Credicorp. We also play precious metal momentum and our generally bullish stance on silver through Silver Wheaton. We avoid Buenaventura given strong outperformance recently, but acknowledge its reserve replacement track record and scarcity value as a liquid Peruvian name.
38
Toledo
Humala
20% 10% 0% Jul-09
Oct-09
Jan-10
Apr-10
Jul-10
Oct-10
Source: Ipsos-Apoyo.
Humala well behind in run-off scenarios
Fujimori
51%
60%
28%
40%
51%
Humala
29%
Castaneda
20%
Growth characteristics and how they are changing After a return to Asia-level GDP growth in 2010 (JPMe GDP growth of 8.2%), we expect growth to taper off to 6% in 2011, mainly due to a pullback in stimulus and tighter monetary policy. However, with tame inflation, strong commodity prices, growing credit growh and the CB on hold, there is room for upside surprises. In addition, given strong economic ties to China, progress there will be a key determinant of the extent of growth.
Castaneda
0% Scenario 1
Scenario 2
Source: Ipsos-Apoyo.
Recovery thus far led by investment
Internal Demand Consumption
40.0
Inv estment
20.0 0.0 -20.0 1Q06 3Q06 1Q07 3Q07 1Q08 3Q08 1Q09 3Q09 1Q10 Source: BCRP.
Peru fwd P/E premium ahead of historical averages
2.5 2.0 1.5 1.0 0.5 0.0 06
07
Source: Datastream and J.P. Morgan.
08
09
10
Ben Laidler (1-212) 622-5252
[email protected]
Latin America Equity Research November 2010
Top picks and stocks to avoid Top picks Credicorp Silver Wheaton Stocks to avoid Buenaventura
P/E (x) 10E
EPS 10E
Div. yield 11E (%)
ROE 11E (%)
Price
Code
Rating
Mkt cap (US$MM)
124.7 27.6
BAP SLW
N OW
10,099 11,374
17.2 38.3
15.2 21.0
7.23 0.72
8.20 1.31
1.7% 0%
22.1% 18.5%
51.7
BVN
N
14,939
19.8
14.6
2.61
3.55
0.9%
26.5%
11E
11E
Source: Bloomberg, J.P. Morgan estimates. Note: Share prices and valuations are as of October 28, 2010.
MSCI Peru absolute and relative to EMF Index 1200
Absolute
MSCI fair value range Relativ e to MSCI EMF Index
FWD PER
(634)
(3026)
1000 PER
800 600
(1764)
PBR
(3495)
(970)
(2635)
400 (751)
DY
200
(2285)
0 Dec-02
Mar-04
May -05
Aug-06
Oct-07
Jan-09
0
Mar-10
500
1000 1500 2000
Source: MSCI, Datastream.
Source: MSCI, IBES, Datastream, J.P. Morgan.
Currency outlook (PEN/USD)
MSCI EPS integer over time
3.5
170
3.3
150
3.1 2.9 2.7
4000 4500
2011
130
J.P. Morgan J.P. Morgan forecast:
110
end Dec 10: 2.78
2010
end Mar 11: 2.84
90
end Jun 11: 2.82
Consensus 70
2.5 Dec 04
2500 3000 3500
Apr 06
Source Bloomberg, J.P. Morgan.
Jul 07
Nov 08
Feb 10
Jun 11
Feb-09
Jul-09
Dec-09
May -10
Oct-10
Source: MSCI, Datastream.
39
Latin America Equity Research November 2010
Key country dynamics All eyes will be on the political situation in 2011 ahead of October presidential elections. The outlook is highly uncertain as most candidates will likely have to reinvent themselves after the death of ex-President Nestor Kirchner. We see this as a potential opportunity for Cristina Fernandez Kirchner and Peronist dissidents (PJ) to unite, while key opposition groups (PRO and Radicals) now face the challenge of adjusting their campaign from a primarily anti-Kirchner stance to a more progressive form. We take a cautious stance and see a Peronist win as the base case but acknowledge that any move toward political/economic orthodoxy and subsequent reform would be a big catalyst for the market. Growth characteristics and how they are changing After accelerated growth in 2010 (JPMe GDP growth 8.5%), growth in 2011 will taper off (JPMe GDP growth 5.5%) as activity is curbed by rapidly rising inflation (JPMe proxy 25-30%). The use of fiscal resources should remain strong, especially in an election year and helped by what we expect to be robust agricultural commodity prices. Risks to growth (upside and downside) are largely tied to the global economy. Drivers of returns – Multiples and growth With the near-term “spread reduction trade” priced and the longer-term “election trade” accelerated on the death of Nestor Kirchner, we believe multiples are for the most part accurately reflecting the current balance of risks. We only see an opportunity for significant further multiple expansion in the event of a more orthodox political and economic environment, backed by a reform agenda. Although there is growing optimism for a move in that direction, we believe it is still too early to tell who will win in 2011 and whether or not a reform agenda can and will be implemented. Furthermore, while the focus is on politics, at the micro level we are likely to see slower growth and inflation thinning margins. Recommendations We focus on names with solid growth prospects in the coming year at attractive valuations that will likely benefit from the immediate political situation (Clarin and Tenaris). We avoid utilities, such as Edenor, which face an uncertain potential reform agenda. That said, the shares are likely to move on any signs of political progress.
40
Brian P. Chase AC 56 2 425 5245
[email protected] Inversiones y Asesorias Chase Manhattan Ltda. Bloomberg JPMA CHASE <GO>
Can Cristina maintain her currently positive image?
60.0% 40.0% 20.0% 0.0% J-08
M-08
S-08 J-09
M-09
S-09
J-10
M-10 S-10
Source: Management y Fit and J.P. Morgan.
Voting intentions suggest the 2011 race is wide open
50%
39%
40% 25%
30% 20% 6%
10%
6%
5%
4%
3%
3%
2%
4%
0% Co bo s Al fo ns in M D e acri Na rva ez Du ha lde Sc R e ioli ute m an n Ot he Un r de cid ed
Argentina Strategy
CF K
Ben Laidler (1-212) 622-5252
[email protected]
Source: Management y Fit and J.P. Morgan.
Inflationary pressures starting to rise
30.00
Indec
Priv ate
20.00 10.00 0.00 J-04 S-04 M-05 J-06 S-06 M-07 J-08 S-08 M-09 J-10 S-10 Source: Indec and J.P. Morgan.
Ben Laidler (1-212) 622-5252
[email protected]
Latin America Equity Research November 2010
Top picks and stocks to avoid P/E (x) 10E
EPS 10E
Div. yield 11E (%)
ROE 11E (%)
Price
Code
Rating
Mkt cap (US$MM)
Top picks Grupo Clarin Tenaris
10.0 41.3
GCLA TS
OW OW
1,437 26,237
3.4 20.1
2.5 16.0
2.92 2.06
4.00 2.59
0% 0.9%
12.7% 14.8%
Stocks to avoid Edenor
10.3
EDN
UW
494
13.3
12.2
0.77
0.84
0%
7.0%
11E
11E
Source: Bloomberg, J.P. Morgan estimates. Note: Share prices and valuations are as of October 28, 2010.
MSCI Argentina absolute and relative to EMF Index 1000
Absolute
MSCI fair value range
Relativ e to MSCI EMF Index
FWD PER
900 800
(4509706) PER
700 600
PBR
300 200
DY
100 0 Dec-02
Mar-04
May -05
Aug-06
Oct-07
Jan-09
`
(33410334)
(50289622)
(15631857)
15400000
30400000
45400000
60400000
Source: MSCI, IBES, Datastream, J.P. Morgan
Currency outlook (ARS/USD)
4.2
(13335147)
400000
Mar-10
Source: MSCI, Datastream.
4.4
(21956168) (66024799)
500 400
4.6
(64068241)
MSCI EPS integer over time
J.P. Morgan forecast:
110
end Dec 10: 4.05
J.P Morgan
end Mar 11: 4.15
100
end Jun 11: 4.15
90
4.0 Consensus
3.8 3.6
2011
80 70
3.4 3.2
60
2010
3.0 50
2.8 Dec 04
Apr 06
Source: Bloomberg, J.P. Morgan.
Jul 07
Nov 08
Feb 10
Jun 11
Feb-09
Jul-09
Dec-09
May -10
Oct-10
Source: MSCI, Datastream.
41
Ben Laidler (1-212) 622-5252
[email protected]
42
Latin America Equity Research November 2010
Ben Laidler (1-212) 622-5252
[email protected]
Latin America Equity Research November 2010
Sectors
Ben Laidler (1-212) 622-5252
[email protected]
Latin America Equity Research November 2010
Agribusiness, Pulp and Paper
Debbie Bobovnikova, CFA AC (1-212) 622-3489
[email protected] J.P. Morgan Securities LLC Bloomberg JPMA BOBOVNIKOVA <GO>
Growth characteristics and how they are changing Growth in 2011 for our covered names will be more a function of commodity prices than of capacity expansions. Longer term, we see all of our companies as having a global cost advantage and expanding production through greenfields, debottlenecking and M&A. Drivers of returns – Multiples and growth We are not expecting multiples rerating as we do not see structural changes justifying it. Multiples should continue to reflect cyclical trends (peak multiples on trough earnings and vice versa). Near-term growth will remain dependent on commodity prices. Recommendations We highlight the Brazilian sugar and ethanol producer Sao Martinho (SMTO3/OW) as the best play on higher near-term sugar prices. We are UW on Fibria (FIBR3/FBR) as we believe pulp sector momentum will remain negative in ’11 and valuations are not yet attractive enough to justify owning at this point of the cycle.
44
Pulp inventories vs. prices 950
4850465047 44 43 41
850
36 750 343434 313232 650
50 45
3534
34 32 30 29 2928 272626 27 2826 27 25 25 25
550
40 35 30 25
450
20 Jan-08 Mar-08 May-08 Jul-08 Sep-08 Nov-08 Jan-09 Mar-09 May-09 Jul-09 Sep-09 Nov-09 Jan-10 Mar-10 May-10 Jul-10 Sep-10
Key country dynamics Grain prices seem to be well supported at current levels even after a 30-60% rally since early July. Robust Chinese demand along with concerns over supply, especially in light of a La Nina year, should keep risk premiums high. As J.P.Morgan’s Soft Commodity Strategy team highlights, there’s a real possibility of corn prices hitting $7/bu in ’11, which would reverberate through the rest of the grain complex. Sugar prices continue to confound, having gone from 30c/lb to 13c/lb and back again in the course of 2010, with the only constant volatility. Any shortfall in Indian and Brazilian production estimates could take sugar prices higher still. That being said, we believe any supply squeeze would be relatively temporary and see sugar prices settling at closer to 15-18c/lb longer term. We remain structural bulls on pulp but cautious on 12M outlook. Pulp prices as of October were already 5% below their June peak, and we expect another ~17% decline through 2011 as pulp supply recovers from market- and weather-related downtime in ’09-’10 and as end demand remains lackluster. That being said, any significant improvement in developed world employment should lead to improved paper demand and poses upside risk to our outlook.
Day s Inv entory (RHS)
BEK, $/tonne to Europe
Source: PPPC, RISI, J.P. Morgan.
Sugar stock/use vs. prices, 00/01-10/11 25
0%
20
10%
15 10
20%
5
30%
0
40% 00/01
02/03
04/05
Price ($c/lb)
06/07
08/09
10/11
Stock-to-Use (%)
Source: USDA, Bloomberg and J.P. Morgan.
Cotton stock/use vs. prices, 00/01-10/11 100
0%
75
20%
50
40%
25
60%
0
80% 00/01
02/03
04/05
Price ($/lb)
06/07
08/09
10/11
Stock-to-Use (%)
Source: USDA, Bloomberg and J.P. Morgan.
Soy stock/use vs. prices, 00/01-10/11 15
0%
10
10%
5
20%
0
30% 00/01
02/03
04/05
Price ($/bu) Source: USDA, Bloomberg and J.P. Morgan.
06/07
08/09
Stock-to-Use (%)
10/11
Ben Laidler (1-212) 622-5252
[email protected]
Latin America Equity Research November 2010
Top picks and stocks to avoid Top picks Sao Martinho Stocks to avoid Fibria
Mkt cap (US$MM)
P/E (x) 10E*
Price (R$)
Code
Rating
23.00
SMTO3
OW
1,529
22
30.03
FIBR3
UW
8,266
17
EPS (R$) 10E*
11E*
Div. yield 11E* (%)
ROE 11E* (%)
9
1.06
2.55
1.2%
11.6%
97
1.76
0.31
0%
5%
11E*
Source: Bloomberg, J.P. Morgan estimates. Note: SMTO3 share price and valuation are as of November 8, 2010. Note: * CY10E = SMTO FY11E, CY11E = SMTO FY12E. FIBR3 share price and valuation are as of October 28, 2010.
Paper and pulp absolute and relative to MSCI LatAm 500
Absolute
Paper and pulp EPS integer
Relativ e to MSCI EMF Index
140 130
450 400
2011
120
350 300
110
250 200
100
2010
90
150 100
80
50 0
70 60
Dec-02
Mar-04
May -05
Aug-06
Oct-07
Jan-09
Mar-10
Feb-09
Jul-09
Dec-09
May -10
Source: MSCI, Bloomberg, IBES, Datastream, J.P. Morgan.
Source: MSCI, Bloomberg, IBES, Datastream, J.P. Morgan.
Paper and pulp 12 mth fwd PE
Paper and pulp trailing PB
45
2
37
1.7
29
1.4
21
1.1
13
0.8
5
0.5
95
97
98
99
00 PE
01
02
03
04
Av g
Source: MSCI, Bloomberg, IBES, Datastream, J.P. Morgan.
05
06
+1SD
07
08
10
-1SD
95
97
98
99
00 PB
01
02
03
04
Av g
05
06
+1SD
Oct-10
07
08
10
-1SD
Source: MSCI, Bloomberg, IBES, Datastream, J.P. Morgan.
45
Ben Laidler (1-212) 622-5252
[email protected]
Latin America Equity Research November 2010
Overweight
Sao Martinho
R$23.00 (08 Nov 10)
SMTO.SA www.saomartinho.ind.br
Price Target: R$29 End Date: Dec 2011
Company description São Martinho is a top-five sugar and ethanol producer in Brazil. In the 2009/10 crop year, São Martinho crushed 13 mt of sugarcane, of which 65% was owned (40% came from third parties) and 40% was destined for sugar production (60% to ethanol). São Martinho operates 3 mills, 2 in São Paulo state and one in Goiás state. The company’s Goiás unit (Boa Vista mill) started up in the 2009 crop and will exclusively produce ethanol and electricity. São Martinho (SMTO3 BZ) shares are listed on Bovespa’s Novo Mercado.
Brazil Agribusiness
Investment case We see Sao Martinho as the best way to gain exposure to stronger global sugar and Brazilian ethanol prices. Given the diversification of the rest of its listed domestic peers, SMTO is now the most exposed operationally to S&E. In addition, we believe the company has interesting partnerships with both Petrobras (rated Neutral by JPM LatAm oil & gas analyst Sergio Torres) and with biotech producers, the latter potentially leading to new revenue streams.
Price performance
Debbie Bobovnikova AC (1-212) 622-3489
[email protected] J.P. Morgan Securities LLC Bloomberg JPMA BOBOVNIKOVA <GO>
R$ 24 20 R$ 16 12
Potential for earnings upgrades Given the sharp rally in sugar and ethanol prices since midyear, there should be significant upside to consensus estimates if it is sustained. Our FY11E EBITDA of R$493m is 8% above consensus.
Nov-09
Mkt Cap (R$ mn) Fiscal Year End Shares O/S (mn) Price Target (R$) Price Target End Date
46
23.00 08 Nov 10 23.00 12.55 2,599.00 Mar 113 29.00 31 Dec 11
Aug-10
Nov-10
Performance 1M
3M
12M
Absolute (%)
23.4
46.9
23.7
Relative (%)
7.6
18.1
14.1
Source: Bloomberg.
Price target and risks We have an OW rating on SMTO3 and a price target of R$29/sh for Dec.’11 based on a mix of: (1) DCF of R$27.5 using normalized sugar prices of 15c/lb and BRL of R$2.05 (equivalent to sugar prices of 18c/lb at spot BRL) and a WACC of 9.3% which incorporates a risk premium for lower share liquidity; (2) 5x multiple on FY12 EBITDA resulting in R$28.3; (3) replacement value analysis leading to R$27.1; and (4) recent M&A multiples of $100/tonne implying FV of R$36.1. Key risks to our rating and estimates on SMTO are: (1) evolution of sugar and ethanol prices; (2) stronger-than-expected BRL; (3) operational problems; (4) worse-than-expected economics of farnesene JV. Sao Martinho S.A. (SMTO3.SA;SMTO3 BZ) 2010A EPS Reported FY (R$) 0.82A Revenues FY (R$ mn) 1,183A EBITDA FY (R$ mn) 374A
May-10
Source: Bloomberg and J.P. Morgan.
Prospects for re-/derating We see Sao Martinho as a well-managed company, with good capital discipline and corporate governance. On the other hand, lack of share liquidity is a concern for many investors, as is the volatility of the sector, which we do not foresee changing in the near term. Hence we are not looking for a rerating.
Company Data Price (R$) Date Of Price 52-week Range (R$)
Feb-10
Priced as of the close on November 8, 2010; see our note out November 9 for further details.
2011E 1.06 1,293 493
Source: Company data, Bloomberg, J.P. Morgan estimates.
2012E 2.55 1,562 646
2013E 2.04 1,427 535
2014E 1.79 1,386 488
Ben Laidler (1-212) 622-5252
[email protected]
Latin America Equity Research November 2010
Sao Martinho: Summary of Financials Income Statement
FY10A
FY11E
FY12E
FY13E
FY14E
Balance Sheet
Revenues Cost of goods sold SG&A Depreciation EBITDA EBITDA margin Financial income Financial expense FX & Monetary gains (losses) Other Nonoperarting income Equity income EBT Taxes Minority interest Extraordinary Net income Net income margin EPS
1,183 928 412 262 374 31.6% 105 171 (3) 0 0 128 (32) 0 0 93 7.9% 0.82
1,293 947 427 286 493 38.1% 14 69 0 0 0 163 (43) 0 0 120 9.3% 1.06
1,562 987 372 222 646 41.4% 42 43 0 384 (96) 0 288 18.4% 2.55
1,427 970 366 223 535 37.5% 54 46 0 307 (77) 0 230 16.2% 2.04
1,386 980 378 230 488 35.2% 66 53 0 269 (67) 0 202 14.6% 1.79
52.8% 58.2% (233.4%) -
9.3% 32.0% 29.1% -
20.8% 31.0% 139.4% -
(8.7%) (17.1%) (20.0%) -
Operating Data, Ratios
FY10A
FY11E
FY12E
Capex Change in working capital Free cash flow Dividends Dividend % of net income Capex/depreciation CAPEX/sales Working capital Working capital/sales
313 12 35 18 19.7% 1.2 26.4% 242 -
174 (49) 202 15 12.7% 0.6 13.5% 290 -
Shipments Avg price/t Cash COGS/t EBITDA/t
1,906 621 353 196
Shipments chg Avg price/t chg Cash COGS/t chg EBITDA/t chg
Revenue growth EBITDA growth Net income growth FCF growth
Capex Maintenance Expansion
FY10A
FY11E
FY12E
FY13E
FY14E
Cash Accounts receivable Inventories Other current assets Net PP&E Other assets Total assets Short-term debt Accounts payable Other current liabilities Long-term debt Deferred taxes Other liabilities Total liabilities Minority interest Shareholders' equity Liabilities + Equity
131 42 218 137 2,548 137 3,321 327 76 79 628 225 296 1,631 0 1,689 3,321
708 40 293 127 2,426 127 3,825 327 80 90 619 219 296 1,632 0 2,193 3,825
912 48 287 127 2,525 127 4,131 279 92 90 663 219 296 1,640 0 2,491 4,130
1,117 44 285 127 2,584 127 4,388 253 90 90 777 219 296 1,725 0 2,663 4,388
1,282 43 283 127 2,645 127 4,612 217 90 90 891 219 296 1,803 0 2,808 4,611
(2.9%) (8.9%) (12.3%) -
Net debt Net Debt/Capital Debt/Capital Net Debt/EBITDA
825 31.2% 28.8% 2.2
239 7.6% 24.7% 0.5
30 0.9% 22.8% 0.0
(87) (2.4%) 23.5% (0.2)
(175) (4.5%) 24.0% (0.4)
FY13E
FY14E
Valuation, Macro
FY10A
FY11E
FY12E
FY13E
FY14E
320 10 239 30 10.4% 1.4 20.5% 280 -
282 4 189 72 31.3% 1.3 19.8% 276 -
290 3 145 58 28.5% 1.3 21.0% 272 -
1,781 726 368 277
1,936 807 395 334
1,917 744 390 279
2,005 691 374 243
EV/EBITDA P/E P/BV EV/tonne FCF yield Dividend yield ROE Net income margin Net revenue/Assets Assets/Equity ROIC Shares ADRs
9.2 27.9 1.5 263 1.4% 5.5% 7.9% 35.6% 2.0 3.6% 113 -
5.8 21.6 1.2 222 7.8% 5.5% 9.3% 33.8% 1.7 5.4% 113 -
4.1 9.0 1.0 194 9.2% 11.6% 18.4% 37.8% 1.7 11.1% 113 -
4.7 11.3 1.0 181 7.3% 8.7% 16.2% 32.5% 1.6 8.0% 113 -
5.0 12.9 0.9 168 5.6% 7.2% 14.6% 30.1% 1.6 6.5% 113 -
25.9% 621 353 25.7%
(6.6%) 726 368 41.2%
8.7% 807 395 20.5%
(1.0%) 744 390 (16.3%)
4.6% 691 374 (12.9%)
DCF WACC Perpetual Growth Cost of equity Cost of debt
27.47 9.3% 2.2% 11.8% 4.6%
313 217 96
174 114 60
320 160 160
282 167 115
290 175 116
Source: Company reports and J.P. Morgan estimates. Note: R$ in millions (except per-share data). Fiscal year ends Mar
47
Ben Laidler (1-212) 622-5252
[email protected]
Latin America Equity Research November 2010
Underweight
Fibria
R$30.03 (28 Oct 10)
FIBR3.SA www.fibria.com.br
Price Target: R$26 End Date: Dec 2011
Company description Fibria was formed by the merger of VCP and Aracruz and is the leading market pulp producer in the world, with 11% global market share. It has 5.6mt of market pulp capacity at 5 sites in Brazil along with 540,000 ha of eucalyptus plantations. The company is controlled by the Votorantim Group (29%) and by the local development bank, BNDES (30%), and has recently migrated to the Novo Mercado level of the Bovespa, the highest corporate governance standard in Brazil.
Brazil Pulp and Paper
Investment case Despite our structurally optimistic view on the sector, we continue to see downside to near-term pulp prices and believe that neither sector momentum nor company valuations provide reasons for owning the stock at this point.
Price Performance
Potential for earnings upgrades Fibria is highly sensitive to changes in pulp prices given its operational focus (>90% of profits) and levered balance sheet (4.7x ND/EBITDA as per last reported balance sheet). Every $30/t move in the pulp price leads to a 10% change in EBITDA. Our sense is that consensus estimates are assuming flat pulp prices for ’11, suggesting downside risk to estimates if we are right on the pulp cycle outlook.
Debbie Bobovnikova, CFA AC (1-212) 622-3489
[email protected] J.P. Morgan Securities LLC Bloomberg JPMA BOBOVNIKOVA <GO>
40 R$
30 20 Oct-09
Jan-10
Jul-10
Oct-10
Source: Bloomberg.
Performance Absolute (%)
Prospects for re-/derating Cyclical stocks tend to trade at higher multiples on trough earnings and vice versa. Given our expectation of still an above average cyclical year in ’11 for prices (BEK avg of $800/t vs. normalized $750), we believe the stock should trade at or below a normalized multiple of ~8x.
Apr-10
1M
3M
12M
8.2
5.8
19.9
Source: Bloomberg.
Price target and risks We rate Fibria UW and have a R$26 ($16) Dec-11 price target. Our price target is based on: (1) DCF analysis using 9.6% WACC (R$24/sh); (2) 8x target multiple on ’11E EBITDA (R$24/sh) and (3) replacement value (R$30.5/sh). Key upside risks to our UW rating include: (1) higher pulp prices; (2) weaker BRL; (3) potential divestiture of paper assets. Fibria Celulose S.A. (FIBR3.SA;FIBR3 BZ) Company Data Price (R$) Date Of Price 52-week Range (R$) Mkt Cap (R$ mn) Fiscal Year End Shares O/S (mn) Price Target (R$) Price Target End Date
48
30.03 28 Oct 10 41.50 22.98 14,052.09 Dec 468 26.00 31 Dec 11
EBITDA FY (R$ mn) Bloomberg EBITDA FY (R$ mn) EPS Reported FY (R$) Source: Company data, Bloomberg, J.P. Morgan estimates.
2009A 1,472 1,580 1.44
2010E 2,806 2,955 1.76
2011E 2,620 3,454 0.31
Ben Laidler (1-212) 622-5252
[email protected]
Latin America Equity Research November 2010
Fibria: Summary of Financials Income Statement
FY09A
FY10E
FY11E
FY12E
FY13E
Balance Sheet
FY09A
FY10E
FY11E
FY12E
FY13E
Revenues Cost of goods sold SG&A Depreciation EBITDA EBITDA margin Financial income Financial expense FX & Monetary gains (losses) Other Nonoperarting income Equity income EBT Taxes Minority interest Extraordinary Net income Net income margin EPS
6,000 639 1,248 1,472 24.5% 487 (1,492) 2,775 0 0 1.44
7,173 657 1,466 2,806 39.1% 143 (821) (22) 0 0 1.76
7,142 683 1,330 2,620 36.7% 20 (730) (435) 0.31
7,204 694 1,405 2,747 38.1% 51 (750) (362) 0.60
7,853 754 1,534 3,019 38.4% 38 (766) (296) 0.99
Cash Accounts receivable Inventories Other current assets Net PP&E Other assets Total assets Short-term debt Accounts payable Other current liabilities Long-term debt Deferred taxes Other liabilities Total liabilities Minority interest Shareholders' equity Liabilities + Equity
3,898 842 948 671 28,324 94 18,290 10,015 -
327 829 1,047 412 28,239 159 12,641 15,579 -
851 857 1,027 398 28,827 158 12,685 16,124 -
625 865 1,027 398 29,613 160 12,898 16,696 -
906 942 1,077 398 30,437 174 13,080 17,338 -
-
-
-
-
-
Net debt Net Debt/Capital Debt/Capital Net Debt/EBITDA
10,817 43.7% 6.4
10,387 39.5% 3.7
9,864 36.7% 3.8
10,311 37.3% 3.8
10,155 35.7% 3.4
Operating Data, Ratios
FY09A
FY10E
FY11E
FY12E
FY13E
Valuation, Macro
FY09A
FY10E
FY11E
FY12E
FY13E
Capex Change in working capital Free cash flow Dividends Dividend % of net income Capex/depreciation CAPEX/sales Working capital Working capital/sales
1,609 (121) (2,038) -
1,247 200 1,467 -
1,400 50 560 -
2,409 (16) (377) -
1,949 (71) 271 -
Shipments Avg price/t Cash COGS/t EBITDA/t
-
-
-
-
-
12.9 21.3 7.7% 9.8% 5.6% 3.8% -
8.6 17.5 (6.7%) 32.6% 5.3% 5.6% -
9.0 98.7 8.6% 118.6% 0.9% 4.6% -
8.7 51.1 2.6% 229.0% 1.7% 4.7% -
7.9 31.1 8.3% 376.6% 2.7% 5.1% -
Shipments chg Avg price/t chg Cash COGS/t chg EBITDA/t chg
-
-
-
-
-
1,609 -
1,247 -
1,400 -
2,409 -
1,949 -
Revenue growth EBITDA growth Net income growth FCF growth
Capex Maintenance Expansion
EV/EBITDA P/E P/BV EV/tonne FCF yield Dividend yield ROE Net income margin Net revenue/Assets Assets/Equity ROIC Shares ADRs DCF WACC Perpetual Growth Cost of equity Cost of debt
Source: Company reports and J.P. Morgan estimates. Note: R$ in millions (except per-share data). Fiscal year ends Dec
49
Latin America Equity Research November 2010
Recommendations Overweight: Santander Brasil (top pick), Banco Bradesco, Banco Itaú Unibanco, Grupo Financiero Galicia, Bladex. Avoid: Grupo Financiero Inbursa, Bancolombia, Redecard, and Cielo.
50
5.0
Santander Chile Banco de Chile Credicorp
4.0
Itau Unibanco
Bancolombia Macro
3.0
GFInbursaGFGalicia
Bradesco
GFNorte Banco do Brasil
2.0
Santander Brasil
1.0
Bladex
0.0 0.0%
2.0%
4.0%
6.0%
8.0%
10.0%
12.0%
14.0%
16.0%
18.0%
20.0%
Risk Adjusted ROE (2011-2012)
Source: J.P. Morgan and Bloomberg, share price data as of October 28, 2010. Riskadjusted ROE calculated by subtracting est COE from forecast ROE in 2011 and 2012.
Share price performance in local currency – YTD: Latin American financials ex-Brazil were the main outperformers 81%
57% 56% 42% 42% 40% 38% 36% 29% 27%
22%
17%
13% 13% 10% 10%
7%
6%
6%
3%
3%
-5%
Source: Bloomberg. Share price data through October 28, 2010. Credicorp’s share price is adjusted for the performance of the currency (Nuevo Sol).
Cielo
Redecard
Ibovespa
S&P
Santander Brasil
KBW bank Index
Bladex
Itau Unibanco
Banorte
Mexico Index
Bradesco
Banco do Brasil
Porto Seguro
Compartamos
Argentina Index
Peru Index
Chile Index
Inbursa
-21% Bancolombia
Drivers of returns – Multiples and growth When regressing expected 2011 and 2012 ROEs against price-to-book value multiples for Latin American banks in our coverage universe, Santander Brasil, Itau Unibanco, Bradesco, and Banco do Brasil trade roughly 5%-20% below the fair price to book value predicted by the regression analysis. We expect a convergence of multiples across the region as the Brazilian banks continue posting good results and some of the “macro” overhangs related to the sector (election cycle, equity offerings) have been removed.
6.0
Santander Chile
What could be the positive drivers for banks? Operating dynamics remains favorable for Brazilian banks. We see good double-digit earnings growth driven by 15%-20% loan growth, some efficiency improvements, and lower credit losses. For Banorte, loan growth will likely re-emerge and delinquency rates should continue declining, thereby leading to healthy earnings growth of 26.5% in 2011, according to our estimates. We see continued high-20% ROEs for Santander Chile and Banco de Chile in an environment of moderate inflation and good economic growth. Bancolombia should generate ROE expansion (albeit from a relatively low high-teen range) as loan growth picks up and, possibly, interest rates rise. At Credicorp, strong loan growth and cost controls should offset lower trading gains and drive 13% earnings growth in 2011.
Regression of risk-adjusted ROE to price-to-book value multiples: Brazilian banks are still trading below the regression line
Credicorp
In contrast with the positive credit trends, we have a cautious view of the Brazilian merchant acquiring business. We believe pressure on MDRs and POS rental rates should be meaningful in the coming years.
Bloomberg JPMA MARTINEZ <GO>
Banco de Chile
Key country dynamics We continue to see mostly favorable credit dynamics in the region. In Brazil, Peru, Chile, and Argentina, we believe that credit growth should remain healthy in 2011. We are forecasting loan growth of 17%-19% for the banks we cover in these markets. Asset quality trends should also continue improving, albeit at a more moderate pace than in 2010. In addition, we are seeing rapidly improving credit trends in Mexico and Colombia, which we expect to continue. However, continued low benchmark rates could pose risk to NIMs in Mexico.
(1-212) 622-3602
[email protected] J.P. Morgan Securities LLC
P /B V
Financials
Saul Martinez AC
Macro
Ben Laidler (1-212) 622-5252
[email protected]
Ben Laidler (1-212) 622-5252
[email protected]
Latin America Equity Research November 2010
Top picks and stocks to avoid Top picks Santander Brasil Bradesco Stocks to avoid Bancolombia (ADR)
Price
Code
Rating
R$24.57 R$34.96
SANB11 BBDC4
OW OW
$66.04
CIB US
UW
P/E (x) 10E
11E
54,565 76,854
15.0 13.5
10.7 12.2
13,007
20.0
18.0
Mkt cap (US$MM)
EPS 10E
11E
Div. yield 11E (%)
ROE 11E (%)
R$1.62 R$2.59
R$2.13 R$2.88
5.2 2.9
14.4 21.2
$3.30
$3.68
1.8
18.4%
Source: Bloomberg, J.P. Morgan estimates. Note: Share prices and valuations are as of October 28, 2010.
Financials absolute and relative to MSCI LatAm 1200
Financials EPS integer
Absolute
Relativ e to MSCI EMF Index
160 2011
150
1000
140
800
130
600
120
400
110
2010
100
200
90
0
80
Dec-02
Mar-04
May -05
Aug-06
Oct-07
Jan-09
Mar-10
Feb-09
Jul-09
Dec-09
May -10
Source: MSCI, Bloomberg, IBES, Datastream, J.P. Morgan.
Source: MSCI, Bloomberg, IBES, Datastream, J.P. Morgan.
Financials 12 mth fwd PE
Financials trailing PB
16
Oct-10
4.5 4
14
3.5
12
3 2.5
10
2
8
1.5
6
1
4
0.5
95
97
98
99
00 PE
01
02
03
04
Av g
Source: MSCI, Bloomberg, IBES, Datastream, J.P. Morgan.
05
06
+1SD
07
08
10
-1SD
95
97
98
99
00 PB
01
02
03
04
Av g
05
06
+1SD
07
08
10
-1SD
Source: MSCI, Bloomberg, IBES, Datastream, J.P. Morgan.
51
Ben Laidler (1-212) 622-5252
[email protected]
Latin America Equity Research November 2010
Banco Santander Brasil SANB11.SA www.santander.com.br
Overweight R$24.57 (28 Oct 10)
Price Target: R$33 End Date: Dec 2011
Company description Santander Brasil is Brazil’s 3rd-largest private bank, based on assets, loans, deposits. The bank serves individuals and corporates and has grown through acquisitions, notably of Banespa, in November 2000 and Banco Real from ABN AMRO in 2008. The bank IPO’d in October 2009. As of Sept 2010, the bank has assets of R$357bn, loans of R$153bn and equity of R$73.0 bn.
Brazil Financial Institutions Saul Martinez AC (1-212) 622-3602
[email protected] J.P. Morgan Securities LLC Bloomberg JPMA MARTINEZ <GO>
Investment case As a leading financial institution, Santander should benefit from growth in penetration. In addition, earnings growth driven by volumes, cost saves, lower credit losses, coupled with capital optimization, should drive meaningful ROE expansion. We see adjusted IFRS ROE growing to 16.4% by 2012 from 1112% now. This should see P/BV expansion from its current 1.7x BV. Our 2011 price target of R$33 is based on a target 11E book value multiple of 2.2x. Potential for earnings upgrades There is a lack of consensus about which accounting standards sell-side analysts base financial projections for Santander Brasil on (IFRS or Brazilian GAAP). Hence, it is difficult to assess the extent earnings upgrades are possible. Our forecasts and the company’s primary reporting standard is IFRS. We forecast IFRS earnings growth of 28.8 % in 2011 and 17.3% in 2012. How much is already priced in? We do not believe the multiyear ROE expansion is adequately priced. In 2012, we expect the bank to generate adjusted IFRS ROE of 16.4%. Based on current ROEs vs P/BV multiples for publicly traded Latin American banks in our coverage universe, this ROE is consistent with a P/BV multiple of 2.1x.
Price Performance 26 24 R$ 22 20 18 Oct-09
Jan-10
Apr-10
Jul-10
Oct-10
1M
3M
Absolute (%)
13.8
12.7
9.0
Relative (%)
7.3
-1.3
-13.2
Source: Bloomberg.
Performance 12M
Source: Bloomberg.
Price target and risks YE11 R$33/share, US$18/ADR (at JPM’s 2011 FX of R$1.8). We use a residual income model & regression of risk-adjusted ROE to P/BV. Key risks: resumption of asset quality deterioration; failure to realize cost synergies from Banco Real merger; slower loan growth recovery; business disruptions due to IT integration issues; negative ruling from federal government on deductibiltiy of goodwill amortization for tax purposes; negative actions taken by Santander Spain that could impact the growth and profitability of Santander Brasil. Company Data Price (R$) Date Of Price 52-week Range (R$) Mkt Cap (R$ mn) Fiscal Year End Shares O/S (mn) Price Target (R$) Price Target End Date
52
24.57 28 Oct 10 25.99 17.93 93,376.32 Dec 3,800 33.00 31 Dec 11
Banco Santander (Brasil) S.A. (SANB11.SA;SANB11 BZ) 2009A 2010E EPS - Recurring (R$) Q1 (Mar) 0.21 0.37A Q2 (Jun) 0.44 0.38A Q3 (Sep) 0.33 0.42A Q4 (Dec) 0.31 0.46A FY 1.31 1.62A EPS Reported FY (R$) 1.70 1.99A
2011E
2012E
2.13 2.56
2.57 3.00
Source: Company data, Bloomberg, J.P. Morgan estimates. Please note that EPS Recurring stands for EPS IFRS adjusted and EPS Reported stands for EPS IFRS.
Ben Laidler (1-212) 622-5252
[email protected]
Latin America Equity Research November 2010
Banco Santander (Brasil) S.A.: Summary of Financials Income Statement Interest Income Interest Expense Net interest Income LL Provision Net Interest Income after Provision Fee Income Other Non Interest Income Personnel Expenses Non Interest Expenses Other Non Interest Expense Non-Operating Income/(Expenses) Non recurring income (losses) Pretax income Taxes Statutory Profit Sharing Minority Interests Extraordinary Net Income Recurring Net Income Dividends Operating Data, Ratios Per share analysis EPS EPADR BVPS Dividend per Share BVADR Dividend/ADR Growth EPS growth Fee income Non interest expenses Loan Deposits Ratios NIM Fees/Expenses PDL/Loans LL Reserves/Total Loans LL Reserves/NPL Cost/Income Loans/Deposits Loans/Assets Equity/Assets Dividend Payout
FY09A
FY10E
FY11E
FY12E FY13E Balance Sheet
40,436 40,480 47,213 53,179 (18,269) (16,555) (19,862) (22,113) 22,167 23,925 27,351 31,067 (9,983) (8,520) (9,612) (10,818) 12,184 15,405 17,739 20,249 6,238 6,991 7,969 9,005 2,874 1,583 1,693 1,784 (10,947) (11,241) (11,803) (12,747) (5,615) (3,214) (3,131) (3,445) 3,403 240 150 150 8,137 9,763 12,616 14,997 (2,629) (2,190) (2,902) (3,599) 51 30 0 0 5,508 7,573 9,715 11,397 5,457 7,543 9,715 11,397 1,575 3,939 4,857 5,699
-
FY09A
FY10A
FY11E
1.31 0.87 13.76 0.41 7.88 0.21
1.62 0.92 14.34 1.04 8.20 0.59
2.13 1.18 15.20 1.28 8.21 0.71
2.57 1.38 16.27 1.50 8.47 0.80
-
3.2% 5.5% (5.1%) (1.3%) (6.4%)
38.2% 12.1% 2.7% 15.9% 26.4%
28.8% 14.0% 5.0% 18.4% 14.4%
17.3% 13.0% 8.0% 17.7% 13.8%
-
9.6% 57.0% 6.7% 92.5% 101.7% 38.5% 89.2% 48.6% 21.9% 28.8%
9.4% 62.2% 5.7% 5.8% 102.0% 36.4% 82.6% 49.1% 19.3% 52.2%
9.2% 67.5% 5.1% 5.2% 102.0% 33.4% 85.5% 50.2% 17.4% 50.0%
8.9% 70.6% 4.8% 5.7% 102.0% 31.8% 88.4% 52.0% 16.2% 50.0%
-
FY09A
FY10E
FY11E
82,816 27,269 152,163 17,984 35,739 315,971 170,636 27,178 48,893 246,707 69,265
85,319 58,697 178,077 17,715 36,319 376,127 215,669 30,438 57,318 303,426 72,695
98,828 73,371 210,876 19,521 32,964 435,560 246,667 33,273 79,680 359,619 75,934
FY09A
FY10A
FY11E
FY12E FY13E
P/E P/BV Dividend yield ROE ROA
14.5 1.8 1.7% 9.9% 1.5%
12.3 1.7 4.2% 11.6% 1.9%
9.6 1.6 5.2% 14.4% 2.1%
8.2 1.5 6.1% 16.4% 2.2%
-
Shares ADRs
3,800 -
3,800 -
3,800 -
3,800 -
-
Securities Cash and Due from Banks Interbank Investment Loan and Leasing Operatings Other Receivables and Assets Permanent Asset Total assets Total deposits Demand deposits Savings deposits Interbank deposits Time deposits Interest bearing liabilities Other Current Liabilities Total Liabilities Shareholders' equity
FY12E FY13E Valuation, Macro
FY12E FY13E 110,688 81,442 248,134 21,511 32,964 494,739 280,696 36,253 97,769 414,717 80,015
Source: Company reports and J.P. Morgan estimates. Adjusted IFRS figures. Note: R$ in millions (except per-share data). Fiscal year ends Dec.
53
-
Ben Laidler (1-212) 622-5252
[email protected]
Latin America Equity Research November 2010
Underweight
Bancolombia
$68.74 (4 Nov 10)
CIB www.grupobancolomia.com
Price Target: $65 End Date: Dec 2011
Company description Bancolombia is Colombia’s largest bank (23% loan share). It also owns Banagricola, El Salvador’s largest bank (31% share). The company also provides financial products in Panama, Peru, Brazil, the US and Spain.
Colombia Financial Institutions Saul Martinez AC
Investment case Bancolombia is the leader in the underpenetrated Colombian and El Salvador banking systems. Economic activity is improving and rates are unsustainably low in Colombia and likely to increase, benefiting earnings and profitability. We forecast local currency earnings growth of 19.2%, on average, from 2010 to 2012, and for ROEs to expand to 19.2% in 2012 from 17.9% in 2010. Newly elected President Santos has a market-friendly economic policy. This could lead to policy changes, such as modifications to the existing usury laws, that would increase the maximum interest rate that can be charged by banks. Potential for earnings upgrades Faster-than-expected economic growth and an increase in NIMs due to higher rates lead to upside risk to consensus local currency numbers. US$ earnings could also benefit if the Colombian peso remains strong. Our 2011 EPADR estimate incorporates an average COP/US$ exchange rate of 2,200 versus the November 4th exchange rate of COP1,818/US$. Prospects for re-/derating Even factoring in improving prospects, the bank is pricing ample improvement. The stocks trades 3.4x bv and 18.0x 12e local EPS (18x 12e US$ earnings). It is generating ROEs of about 18%. Our regression of ROE to P/B using a cross section of LatAm banks, shows this is consistent with a 2.8x P/B multiple. Ultimately, we feel Bancolombia benefits from scarcity value; being the only domestic-focused stock with a liquid ADR. Hence, it may be susceptible to the emergence of alternative domestic investment opportunities. Operationally, while good local currency earnings growth is likely, Bancolombia has lost share in consumer lending and struggled with costs.
(1-212) 622-3602
[email protected] J.P. Morgan Securities LLC Bloomberg JPMA MARTINEZ <GO>
Price Performance 65 $
55 45 35 Oct-09
Jan-10
Apr-10
Jul-10
Oct-10
Source: Bloomberg.
Performance 1M
3M
12M
Absolute (%)
2.9
6.6
56.1
Relative (%)
-1.0
5.5
48.2
Source: Bloomberg.
Priced as of the close on November 4, 2010; see our note out November 5 for further details.
Price target and risks YE11 US$60/ADR (at JPM’s end-2011e FX of COP$2,200). We use a residual income model and regression of risk-adjusted ROE to P/B. Key risks: fasterthan-expected improvement in economic conditions; a faster-than-expected rebound in NIMs; value-creating acquisitions; and continued positive sentiment toward the country’s improving macroeconomic and political dynamics. Bancolombia S.A. (CIB;CIB US) Company Data Price ($) Date Of Price 52-week Range ($) Mkt Cap ($ mn) Fiscal Year End Shares O/S (mn) Price Target ($) Price Target End Date
54
68.74 04 Nov 10 69.44 40.10 13,538.81 Dec 197 65.00 31 Dec 11
EPADR - Recurring ($) Q1 (Mar) Q2 (Jun) Q3 (Sep) Q4 (Dec) FY
2009A
2010E
2011E
2012E
0.65 0.68 0.72 0.64 2.77
0.89A 0.77A 1.03A 0.96A 3.65A
3.97
4.28
Source: Company data, Bloomberg, J.P. Morgan estimates.
Ben Laidler (1-212) 622-5252
[email protected]
Latin America Equity Research November 2010
Bancolombia: Summary of Financials Income Statement
FY09A
FY10E
FY11E
FY12E Balance Sheet
Interest Income 6,427,698 5,009,056 6,053,546 7,315,953 Interest Expense (2,625,416) (1,575,512) (2,049,436) (2,601,836) Net interest Income 3,802,282 3,433,543 4,004,110 4,714,117 LL Provision (1,153,374) (594,373) (694,071) (917,678) Net Interest Income after provision 2,648,908 2,839,170 3,310,040 3,796,439 Fee Income 1,506,273 1,573,672 1,762,513 1,956,389 Foreign Exchange and Trading transaction 380,676 495,949 547,232 547,232 Non Interest Income 198,761 193,658 183,975 193,174 Non Interest Expenses (3,000,674) (3,189,237) (3,489,950) (3,854,198) Non Operating results Pretax income 1,733,944 1,913,212 2,313,809 2,639,036 Taxes (462,013) (530,139) (654,172) (746,493) Statutory Profit Sharing Minority Interest (15,081) (17,260) (18,468) (19,761) Net Income 1,256,850 1,365,813 1,641,169 1,872,782 Recurring Net Income 1,170,050 1,365,813 1,641,169 1,872,782 Dividends Operating Data, Ratios Per share analysis EPS BVPS Dividend per Share Growth EPS growth Fee income Non interest expenses Loan Deposits Ratios NIM Fees/Expenses PDL/Loans LL Reserves/Total Loans LL Reserves/NPL Cost/Income Loans/Deposits Loans/Assets Equity/Assets Dividend Payout
FY09A
FY10E
FY11E
FY12E
Securities 8,436,244 8,895,070 9,517,725 10,183,965 Loans, gross 42,041,974 47,811,195 55,561,779 64,647,131 Cash and due from Banks 7,372,359 5,417,489 5,742,538 6,144,516 Repurchase Agmt and Derivatives Loan loss reserves (2,431,667) (2,453,431) (2,497,502) (2,715,179) Other assets 6,445,455 7,225,066 7,663,474 7,719,250 Total assets 61,864,365 66,895,388 75,988,014 85,979,682 Total deposits 42,149,330 43,978,839 50,920,026 58,554,431 Other funding 5,428,960 5,890,742 6,479,816 7,127,798 Bonds and subordinated debts Other liabilities 7,253,246 9,118,253 9,572,115 10,048,671 Total liabilities 61,864,365 66,895,388 75,988,014 85,979,682 Shareholder's equity
FY09A
FY10A
FY11E
FY12E Valuation, Macro
2.97 17.44 1.08
3.65 19.66 1.34
3.97 20.41 1.29
P/E 4.28 P/BV 22.94 Dividend yield 1.46 ROE ROA
(2.6%) 14.7% 10.1% (5.8%) 4.4%
31.9% 4.5% 7.0% 13.7% 4.3%
8.8% 12.0% 9.9% 16.2% 15.8%
7.8% Shares 11.0% ADRs 9.6% 16.4% 15.0%
6.6% 53.3% 3.9% 5.8% 149.4% 49.7% 99.7% 68.0% 11.4% 36.3%
5.7% 52.0% 3.3% 5.1% 155.5% 55.0% 108.7% 71.5% 11.8% 36.8%
6.0% 53.0% 3.1% 4.5% 145.0% 52.6% 109.1% 73.1% 11.9% 32.5%
7,032,829 7,907,555 9,016,057 10,248,783
FY09A
FY10A
FY11E
FY12E
23.1 3.9 1.6% 17.8% 1.9%
18.8 3.5 2.0% 19.1% 2.2%
17.3 3.4 1.9% 19.4% 2.3%
16.1 3.0 2.1% 19.4% 2.3%
197
197
197
197
6.2% 53.7% 3.0% 4.2% 140.0% 50.5% 110.4% 75.2% 11.9% 34.2%
Source: Company reports and J.P. Morgan estimates. Note: $ in millions (except per-share data). Fiscal year ends Dec
55
Latin America Equity Research November 2010
77%
82%
86%
89%
Belgium
76%
Peru
Portugal
76%
Sweden
70%
Mexico
69%
UK
Chile
53%
Brazil
47%
65%
France
31%
39%
64%
Colombia
Figure 1: Brazil/Mexico: Access to funding remains a key bottleneck for small banks, hence our focus on balance sheet strength (market share of deposits of top 5 banks)
Argentina
In our coverage of 6 SMid cap financials in Brazil and Mexico, we like Banrisul, Cetip and Compartamos. We base our preference for SMid caps on: 1) strong balance sheets (high BIS, high loan-loss coverage, stable funding, low debt ratio); 2) low risk of pricing/margin pressure; 3) best EPS growth; 4) M&A potential; 5) limited political/regulatory risk; 6) product diversification in 2011e adding new revenues sources; 7) attractive growth-adjusted valuations.
Bloomberg JPMA DEMARIZ <GO>
Italy
Key country dynamics SMid caps should continue to experience above-system growth in 2011, especially in SME lending and microlending, on the back of favorable macroeconomic trends and low leverage. We like banks with solid balance sheets, especially good access to funding, as we view this is as a structural weakness of small banks (Figure 1). 2010 was about asset quality; in 2011, investor focus will be on possible pressure on margins.
(55-11) 3048-3398
[email protected] Banco J.P. Morgan SA
Spain
SMid Cap Financials
Frederic de Mariz AC *
USA
Ben Laidler (1-212) 622-5252
[email protected]
Source: Central banks and J.P. Morgan.
Figure 2: Brazil: Loans-to-GDP ratio: We expect SME lending to play a key role in the next growth phase 50 45 40 35
In Mexico, Compartamos should continue to grow, on the back of 1) the underpenetration of lending, especially for lower-income segments; 2) the benign regulatory environment (we don’t think problems in Indian microfinance will spill over to other markets); 3) contained competition. Drivers of returns – Multiples and growth Loan growth will be the main earnings driver, while inflows (especially from foreign investors) will continue to support valuations. Efficiency gains will also drive earnings growth, and we expect efficiency to improve (at Banrisul) or remain stable (at Cetip and Compartamos). Recommendations Overweight: Banrisul, Cetip, Compartamos. Stocks to avoid: PanAmericano.
56
30 25
Source: Brazilian Central Bank.
* Registered/qualified as a research analyst under NYSE/NASD rules.
2009
2007
2005
2003
2001
1999
1997
1995
1993
1991
20 1989
Growth characteristics and how they are changing In Brazil, SME lenders (roughly half of Banrisul’s portfolio is small corporate) should see loan growth above 25% versus a system average of ~20%, adding to recent strong loan growth in Brazil (Figure 2). With loan growth and stable asset quality viewed as a given, investors will focus on margin compression (on the back of changes in mix and/or increased competition). We expect Cetip to see strong earnings growth (JPMe 34% growth in EPS in 2011) on the back of higher volumes.
Ben Laidler (1-212) 622-5252
[email protected]
Latin America Equity Research November 2010
Top picks and stocks to avoid Top picks Banrisul Compartamos Cetip Stocks to avoid PanAmericano
Mkt cap (US$MM)
P/E (x) 10E
Price
Code
Rating
R$18.00 MXN85.93 R$17.95
BRSR6 COMPARTO CTIP3
OW OW OW
3.949 3.032 2.387
11.6x 20.1x 29.8x
R$7.73
BPNM4
UW
1,110
11.9x
EPS 10E
11E
Div. yield 11E (%)
ROE 11E (%)
10.0x 16.4x 22.3x
1.61 4.36 0.61
1.88 5.34 0.81
3% 1% 1%
19.0% 34.8% 45.3%
7.2x
0.64
1.07
8%
16.4%
11E
Source: Bloomberg, J.P. Morgan estimates. Note: Share prices and valuations are as of October 28, 2010.
Loan growth
Non performing loans to total loans 44%
35% 28%
27%
10.2% 9.8%
30% 24%
25%
10.5%10.2% 6.8%
20%
6.0%
17% 15%
2.4% 2.8%
2.5% 2.3%
ABC Brasil
Banrisul
BicBanco 2010e
Compartamos
PanAmericano
ABC Brasil
Banrisul
BicBanco
2011e
2010e
Source: J.P. Morgan estimates.
Compartamos
2011e
Source: J.P. Morgan estimates.
Cost to income
EPS growth 50% 48%
51% 50%
66%
50% 50% 40%
26% 25%
ABC Brasil
PanAmericano
24% 22%
Banrisul
BicBanco 2010e
Source: J.P. Morgan estimates.
17%
Compartamos
PanAmericano
ABC Brasil
22%
16%
Banrisul
2011e
26%
34% 20%
BicBanco 2010e
21%
Cetip
22% 22%
Compartamos
-16% PanAmericano
2011e
Source: J.P. Morgan estimates.
57
Ben Laidler (1-212) 622-5252
[email protected]
Latin America Equity Research November 2010
Banrisul
Overweight
BRSR6.SA www.banrisul.com.br
Price Target: $20
R$18.00 (28 Oct 10)
End Date: Dec 2011
Company description Banrisul is the largest of the small caps under our coverage. It is also the only small bank with access to retail funding. The bank is controlled by the state of Rio Grande do Sul (owns 57%) and has a dominant market share in its home state (17% loan market share). The bank offers a wide variety of loans, including individual (45% of total book, mostly payroll), corporate (32% of loans), real estate (8% of loans), and agribusiness (7% of loans). Banrisul is the 11th-largest bank by assets in Brazil and has a market share of 0.8% of total loans in the Brazilian banking system (largest bank, Banco do Brasil, has 21%).
Latin America SMid Cap Financials Frederic de Mariz AC * (55-11) 3048-3398
[email protected] Banco J.P. Morgan SA Bloomberg JPMA DEMARIZ <GO>
Investment case We have an Overweight rating on the stock (BRSR6) due to the bank’s strong funding structure (based on stable and cheap retail funding), good loan growth outlook (around 25% in 2010-12e), and solid coverage of nonperforming loans (ratio of loan-loss reserves to loans past due 60 days or more 226% in 2Q10).
Price Performance 19 17 R$ 15
Potential for earnings upgrades We expect loan growth to be the main driver of earnings growth, as net interest margins and loan-loss provisions should remain relatively stable in the next 12 months. Additionally, improved operating efficiency (historically a weak point at Banrisul) should continue improving, mostly on the back of lower administrative expenses.
13 11 Mar-10
Jun-10
Sep-10
Source: Bloomberg.
Performance
Prospects for derating Lower-than-expected loan growth and the potential appointment of a new and heterodox management team at the bank could disappoint investors.
Absolute (%)
1M
3M
12M
9.4
29.7
36.7
Source: Bloomberg.
* Registered/qualified as a research analyst under NYSE/NASD rules.
Price target and risks Our Dec-11 price target of R$20 is based on a residual income methodology and a regression of ROE and P/BV multiples for banks. We assume a cost of equity of 13.1% and long-term earnings growth of 5%. Risks to our price target and OW rating include 1) political interference at the bank; 2) lower-thanexpected loan growth; 3) limited gains in efficiency. Banrisul (BRSR6.SA;BRSR6 BZ) Company Data Price (R$) Date Of Price 52-week Range (R$) Mkt Cap (R$ mn) Fiscal Year End Shares O/S (mn) Price Target (R$) Price Target End Date
58
18.00 28 Oct 10 19.05 10.74 7,361.54 Dec 409 20.00 31 Dec 11
EPS - Recurring (R$) Q1 (Mar) Q2 (Jun) Q3 (Sep) Q4 (Dec) FY
2008A
2009A
2010E
2011E
2012E
0.30 0.46 0.27 0.00 1.03
0.26 0.25 0.36 0.45 1.32
0.30A 0.45A 0.43A 0.44A 1.61A
1.88
2.18
Source: Company data, Bloomberg, J.P. Morgan estimates.
Ben Laidler (1-212) 622-5252
[email protected]
Latin America Equity Research November 2010
Banrisul: Summary of Financials Income Statement - Annual Net interest income Provisions Noninterest income Total revenues Expenses Earnings before taxes Income taxes Profit sharing and minority interest Net income - Reported Nonrecurring income (losses) (AT) Net income - Core Diluted shares outstanding EPS - Reported EPS - Core Dividends
FY08A FY09A FY10E FY11E 1,722 (257) 539 2,004 (1,171) 704 (83) (30) 421 0 421 409 1.03 1.03 0.74
2,542 (423) 579 2,699
2,791 (534) 641 2,898
3,136 (608) 718 3,246
(1,846) (1,888) 853 1,010 (268) (305) (45) (45) 541 660 0 0 541 660 409 409
(2,065) 1,181 (366) (47) 768 0 768 409
1.32 1.32 0.56
1.61 1.61 0.65
Income Statement - Quarterly
1Q10A 2Q10A 3Q10E 4Q10E
Net interest income Provisions Noninterest income Total revenues
647 (154) 150 644
711 (127) 157 741
706 (130) 164 740
727 (123) 170 774
Expenses Earnings before taxes Income taxes Profit sharing and minority interest Net income - Reported Nonrecurring income (losses) Net income - Core Diluted shares outstanding
(462) 182 (48) (11) 122 0 122 409
(464) 277 (83) (11) 183 0 183 409
(472) 268 (80) (11) 177 0 177 409
(490) 283 (94) (11) 179 0 179 409
0.30 0.30 0.10
0.45 0.45 0.19
0.43 0.43 0.18
0.44 0.44 0.17
1.88 1.88 0.75
EPS - Reported EPS - Core Dividends
Balance Sheet
FY08A FY09A FY10E FY11E
Balance Sheet
1Q10A 2Q10A 3Q10E 4Q10E
Securities Total gross loans Loan loss reserves Total net loans Total earning assets Total assets
6,111 11,453 971 10,483 24,495 25,205
7,408 13,414 1,017 12,398 28,197 29,084
8,418 17,023 1,177 15,846 32,037 33,222
8,839 21,109 1,469 19,640 35,142 37,981
Securities Total gross loans Loan loss reserves Total net loans Total earning assets Total assets
7,760 14,766 1,082 13,684 28,913 29,864
8,091 15,442 1,039 14,403 29,980 31,099
8,253 16,060 1,109 14,951 30,997 32,028
8,418 17,023 1,177 15,846 32,037 33,222
Total deposits Total liabilities Common equity Shareholders' equity
14,256 22,126 3,079 3,079
16,370 25,676 3,408 3,408
19,275 29,420 3,802 3,802
22,076 33,719 4,262 4,262
Total deposits Total liabilities Common equity Shareholders' equity
16,520 26,384 3,480 3,480
17,145 27,509 3,590 3,590
18,093 28,334 3,694 3,694
19,275 29,420 3,802 3,802
Ratio Analysis (%)
FY08A FY09A FY10E FY11E
Ratio Analysis (%)
1Q10A 2Q10A 3Q10E 4Q10E
Average loan growth Average earning assets growth Average deposit growth Avg loans / avg deposits
34.2% 19.3% 15.3% 85.9%
20.5% 20.0% 14.8% 90.1%
26.8% 24.0% 14.4% 14.4% 17.7% 15.0% 97.0% 105.0%
Average loan growth Average earning assets growth Average deposit growth Avg loans / avg deposits
9.8% 3.2% 0.9% 98.0%
4.8% 4.0% 3.8% 98.9%
4.0% 2.7% 6.0% 97.5%
6.0% 3.8% 7.0% 97.0%
Net interest margin Efficiency ratio Return on assets (ROA) Return on equity (ROE)
7.8% 4.7% 1.8% 14.3%
9.7% 6.0% 2.0% 16.7%
9.1% 5.5% 2.1% 18.3%
8.9% 5.3% 2.2% 18.5%
Net interest margin Efficiency ratio Return on assets (ROA) Return on equity (ROE)
9.0% 5.9% 1.7% 14.2%
9.5% 5.5% 2.4% 20.7%
9.1% 5.5% 2.2% 19.4%
9.1% 5.5% 2.2% 19.1%
Tangible common equity ratio BIS ratio
20.1%
17.5%
16.5%
15.7%
Tangible common equity ratio BIS ratio
16.5%
15.7%
15.7%
15.5%
NPAs / gross loans Net chargeoffs / average loans Loan loss reserves / loans Loan loss reserves / NPLs
14.2% 1.7% 8.5% 59.6%
11.9% 2.2% 7.6% 63.9%
10.2% 1.5% 6.9% 67.8%
9.8% 1.5% 7.0% 71.0%
NPAs / gross loans Net chargeoffs / average loans Loan loss reserves / loans Loan loss reserves / NPLs
11.3% 2.2% 7.3% 65.0%
10.8% 1.7% 6.7% 62.4%
10.4% 1.5% 6.9% 66.5%
10.2% 1.3% 6.9% 67.8%
Source: Company reports and J.P. Morgan estimates. Note: R$ in Millions (except per-share data).
59
Ben Laidler (1-212) 622-5252
[email protected]
Latin America Equity Research November 2010
Banco PanAmericano
Underweight
BPNM4.SA www.panamericano.com.br
Price Target: $10
R$7.73 (28 Oct 10)
End Date: Dec 2011
Company description PanAmericano offers consumer loans to the lower-income segments of the population, making it an ideal play on rising income levels in Brazil. Roughly two-thirds of the bank’s loan portfolio are vehicle lending, with payroll and credit cards making up the rest of the portfolio. The bank has a network of 199 points of sale, 2.1 million clients and 12.1 million issued credit cards. The bank currently has a market share of 0.4% of loans in the Brazilian banking system (the leader, Banco do Brasil, has a market share of 21%). Investment case We have an out-of-consensus Underweight rating on the stock (BPNM4), due to 1) accounting issues and weak internal controls; 2) uncertainties around the new management team; 3) weaker funding structure than that of other banks in our coverage universe (roughly half of the funding comes from loan cessions, loan securitization and time deposits with a special guarantee), and 4) lower loan growth outlook in auto loans than in other loan segments. Potential for earnings upgrades The bank will continue to suffer from high loan loss provisioning levels (D-H ratio at 10.9% as of 2Q10). Also, tougher competition in the auto lending segment could put pressure on margins. Prospects for rerating We have a cautious view on the benefits that CEF could bring to PanAmericano. CEF announced the purchase of 37% of PanAmericano in Dec09. The stock could rerate if the new management team of PanAmericano were to articulate how the agreement with CEF could 1) improve the funding structure of PanAmericano and/or 2) bring revenue synergies.
Latin America SMid Cap Financials Frederic de Mariz AC * (55-11) 3048-3398
[email protected] Banco J.P. Morgan SA Bloomberg JPMA DEMARIZ <GO>
Price Performance 10.5 R$
9.5 8.5 7.5 Apr-10
Jul-10
Oct-10
Source: Bloomberg.
Performance Absolute (%)
1M
3M
12M
-23.4
-23.9
-37.9
Source: Bloomberg.
* Registered/qualified as a research analyst under NYSE/NASD rules.
Price target and risks Our Dec-11 price target of R$10 is based on a residual income model and a regression analysis of ROE and P/BV. We consider a cost of equity of 13.1% and a long term earnings growth of 6%. Risks to our UW rating relate to a redefinition of the strategy of the bank by the new management team, an improvement in funding structure and significant revenue synergies with CEF.
Company Data Price (R$) 7.73 Date Of Price 28 Oct 10 52-week Range (R$) 12.36 - 6.55 Mkt Cap (R$ mn) 1,888.78 Fiscal Year End Dec Shares O/S (mn) 244 Price Target (R$) 10.00 Price Target End Date 31 Dec 11
60
Banco PanAmericano (BPNM4.SA;BPNM4 BZ) 2008A 2009A EPS - Recurring (R$) Q1 (Mar) 0.28 0.29 Q2 (Jun) 0.36 0.06 Q3 (Sep) 0.27 0.19 Q4 (Dec) 0.04 0.23 FY 0.94 0.77 Source: Company data, Bloomberg, J.P. Morgan estimates.
2010E
2011E
2012E
0.18A (0.09)A 0.24A 0.28A 0.64A
1.07
1.19
Ben Laidler (1-212) 622-5252
[email protected]
Latin America Equity Research November 2010
Banco PanAmericano: Summary of Financials Income Statement - Annual Net interest income Provisions Noninterest income Total revenues Expenses Earnings before taxes Income taxes Profit sharing and minority interest Net income - Reported Nonrecurring income (losses) (AT) Net income - Core Diluted shares outstanding EPS - Reported EPS - Core Dividends
Balance Sheet
FY08A FY09A FY10E FY11E 1,777 (542) 180 1,415 (1,189) 99 (3) (0) 96 14 236 250 0.94 0.94 -
2,237 (730) 118 1,625
2,732 (744) 175 2,163
2,952 (768) 194 2,378
(1,148) (1,566) (1,720) 257 410 472 (82) (193) (151) (0) (1) (1) 174 217 320 (205) (246) (246) 189 157 261 244 244 244 0.77 0.77 0.16
0.64 0.64 0.19
Income Statement - Quarterly
1Q10A 2Q10A 3Q10E 4Q10E
Net interest income Provisions Noninterest income Total revenues
697 (172) 39 565
639 (250) 44 433
691 (144) 45 592
705 (177) 46 574
Expenses Earnings before taxes Income taxes Profit sharing and minority interest Net income - Reported Nonrecurring income (losses) Net income - Core Diluted shares outstanding
(391) 126 (51) (0) 75 (79) 44 244
(397) (23) 11 (0) (11) (68) (21) 244
(402) 150 (75) (0) 75 (50) 58 244
(377) 157 (78) (0) 79 (50) 69 244
0.18 0.18 0.00
(0.09) (0.09) 0.19
0.24 0.24 0.00
0.28 0.28 0.00
1.07 1.07 0.27
EPS - Reported EPS - Core Dividends
FY08A FY09A FY10E FY11E
Balance Sheet
1Q10A 2Q10A 3Q10E 4Q10E
Securities Total gross loans Loan loss reserves Total net loans Total earning assets Total assets
736 6,631 522 6,108 8,900 8,976
1,377 8,784 578 8,206 10,363 11,591
1,862 10,317 704 9,613 12,481 13,725
1,881 11,865 829 11,036 14,688 15,216
Securities Total gross loans Loan loss reserves Total net loans Total earning assets Total assets
1,161 8,984 577 8,407 11,346 11,812
1,826 9,183 660 8,524 12,064 12,583
1,844 9,642 671 8,972 12,852 13,053
1,862 10,317 704 9,613 13,438 13,725
Total deposits Total liabilities Common equity Shareholders' equity
4,413 7,789 1,188 1,188
6,922 10,277 1,314 1,314
0 12,228 1,497 1,497
0 13,523 1,693 1,693
Total deposits Total liabilities Common equity Shareholders' equity
7,115 10,424 1,388 1,388
7,476 11,212 1,371 1,371
0 11,624 1,429 1,429
0 12,228 1,497 1,497
1Q10A 2Q10A 3Q10E 4Q10E
Ratio Analysis (%)
FY08A FY09A FY10E FY11E
Ratio Analysis (%)
Average loan growth Average earning assets growth Average deposit growth Avg loans / avg deposits
33.0% (12.8%) 20.1% 81.1%
32.5% 46.4% 19.5% 89.9%
17.5% 21.4% 25.0% 84.5%
15.0% 11.7% 15.0% 84.5%
Average loan growth Average earning assets growth Average deposit growth Avg loans / avg deposits
29.9% 57.1% 28.7% 87.4%
21.9% 36.4% 29.3% 79.8%
20.7% 24.8% 34.4% 81.3%
17.5% 21.4% 25.0% 84.5%
Net interest margin Efficiency ratio Return on assets (ROA) Return on equity (ROE)
20.0% 10.3% 2.9% 20.0%
21.6% 9.5% 1.8% 15.1%
21.9% 10.5% 1.2% 11.2%
20.1% 9.9% 1.8% 16.4%
Net interest margin Efficiency ratio Return on assets (ROA) Return on equity (ROE)
24.6% 11.0% 1.5% 13.1%
21.2% 11.3% (0.7%) (6.1%)
21.5% 10.5% 1.8% 16.5%
21.0% 9.5% 2.1% 18.8%
Tangible common equity ratio BIS ratio
24.2%
17.0%
17.6%
17.1%
Tangible common equity ratio BIS ratio
14.8%
14.3%
18.0%
17.6%
NPAs / gross loans Net chargeoffs / average loans Loan loss reserves / loans Loan loss reserves / NPLs
12.2% 5.0% 7.9% 11.2%
10.5% 6.7% 6.6% 8.1%
10.5% 5.8% 6.8% 7.5%
10.2% 5.8% 7.0% 6.9%
NPAs / gross loans Net chargeoffs / average loans Loan loss reserves / loans Loan loss reserves / NPLs
10.8% 6.4% 6.4% 2.1%
10.9% 6.2% 7.2% 1.8%
10.7% 6.0% 7.0% 1.8%
10.5% 5.8% 6.8% 2.0%
Source: Company reports and J.P. Morgan estimates. Note: R$ in Millions (except per-share data).
61
Ben Laidler (1-212) 622-5252
[email protected]
Latin America Equity Research November 2010
Food, Beverages & Tobacco Key sector dynamics LatAm beverage markets are mainly oligopolies with rational pricing and stable volume growth. Companies have seen aggregate sales CAGR of 12% last decade. They have little or no debt, robust margins and high ROICs. On the other side, LatAm food can be divided in two: packaged food companies with branded products, and meat/commodities beef companies with volatile margins (raw material and Fx). For tobacco, it is all about brands and pricing power while containing higher taxes and usage restrictions. Growth characteristics and how they are changing Economics, demographics and specific company strategies should keep driving organic LatAm staples growth, especially in beverages. For the food sector we expect a confluence of both organic and inorganic growth as we expect consolidation in the food space to continue. In our view, tobacco sector growth will be driven mostly via pricing and innovation and despite stable to declining volumes. Drivers of returns – Multiples and growth Emerging market staples are trading above developed markets’. This is a first. Plus, the LatAm staples group is already trading at a record premium of 70% over the rest of the LatAm MSCI. We don’t see this gap spreading further, but it should remain stable. A key valuation driver should be use of cash, specifically how much is returned to shareholders. These beverage and tobacco companies pose upside risks to increased dividends. Meat (beef) companies face a different challenges related to how to maintain or expand their low profitability and their delevering process. Recommendations Despite some relatively rich valuations we still see as an opportunity FMX (OW) for EPS growth, CCU (OW) for its relative value and Modelo (OW) for event-driven growth. Among food companies, we prefer processed food powerhouse and poultry exporter Brasil Foods (OW). This company has a solid growth outlook and material upside risk to merger synergies. On our sole tobacco company, Souza Cruz, we currently remain Neutral on valuation. In one sentence, our sector has high-quality names that are not cheap but pose selected opportunities with the right risk/reward balance.
Alan Alanis AC (1-212) 622-3697
[email protected] J.P. Morgan Securities LLC Bloomberg JPMA ALANIS <GO>
Top 8 LatAm bevcos more than tripled revenues ($ bn) this decade Robust top-line CAGR of 12% in the last decade – most of which was organic
60 50 40 30 20 10
16
17
17
20
24
00
01
02
03
04
29
05
35
06
42
07
50
45
45
08
09 10E
S Source: Company reports and J.P. Morgan estimates for AmBev, FEMSA, Grupo Modelo, CCU, Coca-Cola FEMSA, Embotelladora Arca, Andina and Contal.
MSCI EM vs. Developed Market consumer staples, 12 mo. fwd P/E EM staples now trading at 15% premium vs. a 15-year avg. discount of 16% 35 25 15 5 Dec-95 Dec-97 Dec-99 Dec-01 Dec-03 Dec-05 Dec-07 Dec-09 MSCI DM Staples
MSCI EM Staples
Source: Datastream.
MSCI LatAm Consumer Staples vs. MSCI LatAm, 12 mo. fwd P/E LatAm staples now trading at 70% premium to the market 24 19 14 9 4 Dec-95 Dec-97 Dec-99 Dec-01 Dec-03 Dec-05 Dec-07 Dec-09 MSCI Latam Consumer Staples
MSCI Latam
Source: Datastream.
MSCI LatAm Consumer Staples (index constituents) Company AmBev PN Walmex FMX BRFS Cencosud Natura CRUZ3 Hypermarcas Modelo Kimber CBD Bimbo JBS KOF Cosan Exito MRFG3 CCU Conchatoro Total
Weights 18.6% 15.6% 11.7% 9.7% 6.2% 4.8% 4.0% 4.0% 3.6% 3.5% 3.2% 2.7% 2.4% 2.3% 1.9% 1.9% 1.4% 1.3% 1.2% 100%
Source: Datastream. In bold the names under our food, beverage and tobacco coverage.
62
Ben Laidler (1-212) 622-5252
[email protected]
Latin America Equity Research November 2010
Top picks and stocks to avoid
Top picks FEMSA Brasil Foods Stocks to avoid Minerva
P/E (x)
EPS
Price
Code
Rating
Mkt cap (US$MM)
10E
11E
10E
11E
Div. yield 11E (%)
ROE 11E (%)
26.4 23.5
CSMG3 GETI4
OW OW
1,783 5,246
6.4 10.7
6.0 9.8
4.13 2.19
4.39 2.38
8.3 10.7
12.0 181.4
40.4
CPFE3
UW
11,368
13.7
13.9
2.94
2.90
5.4
25.3
Source: Bloomberg, J.P. Morgan estimates. Note: Share prices and valuations are as of October 28, 2010.
Food and beverages absolute and relative to MSCI LatAm 600
Absolute
Food and beverages EPS integer
Relativ e to MSCI EMF Index
130 2011
500
120
400
110
300
100
200
90
100
80
2010
0
70
Dec-02
Mar-04
May -05
Aug-06
Oct-07
Jan-09
Mar-10
Source: MSCI, Bloomberg, IBES, Datastream, J.P. Morgan.
Feb-09
Jul-09
Dec-09
May -10
Oct-10
Source: MSCI, Bloomberg, IBES, Datastream, J.P. Morgan.
Food and beverages 12 mth fwd PE
Food and beverages trailing PB
22
4
20
3.5
18
3
16
2.5
14
2
12
1.5
10
1
8
0.5
95
97
98
99
00 PE
01
02
03
04
Av g
Source: MSCI, Bloomberg, IBES, Datastream, J.P. Morgan.
05
06
+1SD
07
08
10
-1SD
95
97
98
99
00 PB
01
02
03
04
Av g
05
06
+1SD
07
08
10
-1SD
Source: MSCI, Bloomberg, IBES, Datastream, J.P. Morgan.
63
Ben Laidler (1-212) 622-5252
[email protected]
Latin America Equity Research November 2010
Brasil Foods
Overweight
BRFS3.SA www.perdix-international.com
Price Target: R$31
R$24.42 (28 Oct 10)
World’s largest exporter of chicken Brasil Foods (BRFS3) is the merged entity of Perdigao and Sadia, the two leading poultry companies in Brazil. With $15bn in annual revenues, Brasil Foods is the fourth-largest protein co. in the world. It sells mainly poultry. Most BRFS sales are in the domestic Brazilian market, yet it is the global leader in chicken exports. Domestically, BRFS3 is the undisputed leader in processed foods, which have better margins than commodity proteins. The co. also sells pork, beef cuts, milk and other dairy products. Its operations are fully integrated, and it owns the largest number of consumer brands in Brazil. Undisputed leader in the growing Brazilian market Poultry has been the fastest-growing protein globally for well over a decade. Strong demand continues in Brazil and abroad. The premium in price of beef vs. chicken is well above the historical average. We expect beef prices to remain high; given this and recent increases in corn and soy prices, we estimate we are entering a year when prices for global poultry should increase. In this sense, Brasil Foods is well positioned to benefit from this situation. Potential for earnings upgrades – More synergies, less taxes For a LatAm meat company, Brasil Foods’ ’10e net debt to EBITDA of 1.9x is one of the lowest. Plus, once Brazil’s regulatory authority, CADE, approves the integration with Sadia, we believe the company is likely to positively surprise the market with synergies materially higher than its current guidance of R$500mn/year. Net net: with higher-than-expected FCF generation, we see upside risk to our ’11e EPS estimate of R$1.44 for BRFS3.
End Date: Dec 2011 Latin America Food, Beverage and Tobacco Alan Alanis AC (1-212) 622-3697
[email protected] J.P. Morgan Securities LLC Bloomberg JPMA ALANIS <GO>
Price Performance 27 25 R$ 23 21 19 Oct-09
Jan-10
Apr-10
Jul-10
Oct-10
Source: Bloomberg.
Performance Absolute (%)
1M
3M
12M
2.0
8.6
10.9
Source: Bloomberg.
Stock should at least maintain its valuation multiple Although at 8.5x ’11e EV/EBITDA and 17.0x ’11e P/E the stock does not look cheap, we believe these multiples have yet to capture the full value of the company given a) post integration BRFS will have unparalleled scale and pricing power in Brazil, b) that BRFS3 should be a key beneficiary of accelerated global growth in poultry market and, lastly, c) its potential to deliver higher-than-guidance synergies from the merger and yet-to-beaccounted tax benefits. Dec ’11 PT offers 27% potential upside – with some risks Using perpetuity growth of 3% and a WACC of 9.5%, our DCF model indicates a Dec ’11 PT of R$31 for BRFS3, implying 27% upside & a 2% div yield. Key risks are a) a weaker-than-expected rebound in poultry market; b) failure to deliver expected synergies; and c) Fx & grain price volatility. Company Data Price (R$) Date Of Price 52-week Range (R$) Mkt Cap (R$ mn) Fiscal Year End Shares O/S (mn) Price Target (R$) Price Target End Date
64
24.42 28 Oct 10 26.65 19.80 21,305.80 Dec 872 31.00 31 Dec 11
BRF - Brasil Foods SA (BRFS3.SA;BRFS3 BZ) 2009A EBITDA FY (R$ mn) 1,222 EV/EBITDA FY 19.9 Revenues FY (R$ mn) 20,936 EPS Reported FY (R$) 0.28 P/E FY 88.5 Source: Company data, J.P. Morgan estimates.
2010E 2,340 10.9 23,040 0.53 46.0
2011E 2,970 8.6 25,313 1.44 17.0
2012E 3,655 7.0 27,735 1.60 15.3
Ben Laidler (1-212) 622-5252
[email protected]
Latin America Equity Research November 2010
Brasil Foods SA: Summary of Financials Income Statement - Annual
FY09A FY10E FY11E
Income Statement - Quarterly
Revenues Cost of goods sold Gross profit
20,936 23,040 25,313 (16,207) (16,867) (18,431) 4,729 6,173 6,881
Revenues Cost of revenues Gross profit
5,047 (3,768) 1,279
5,532 (4,018) 1,514
5,924 (4,338) 1,586
6,537 (4,743) 1,794
Other operating expenses Operating income
(1,008) 271
(1,121) 393
(1,198) 388
(1,313) 482
447
587
595
710
(156)
(170)
(211)
(161)
51
151
112
249
0 7 (13.7%)
1 (13) 8.6%
(20) 18.0%
(45) 18.0%
53
131
86
191
(64)
(72)
(65)
(72)
53
132
87
192
SG&A LFL Operating income
1Q10A 2Q10A 3Q10E 4Q10E
(4,313) 416
(4,639) 1,534
(4,797) 2,084
LFL EBITDA
1,222
2,340
2,970
EBITDA
Interest, net
588
(698)
(598)
Interest, net
Pretax income
740
563
1,633
Pretax income
0 (499) 67.3%
(71) 12.6%
(294) 18.0%
Equity income Income taxes Tax rate
220
460
1,252
Net income - operating
(263)
(273)
147
Net income - reported (GAAP)
241
463
1,255
Diluted shares outstanding
872
872
872
Diluted shares outstanding
872
872
872
872
EPS (LFL) EPS - reported (GAAP) EPS - consensus (I/B/E/S)
0.28 0.28 0.76
0.53 0.53 0.80
1.44 1.44 1.32
EPS (LFL) EPS - reported (GAAP) EPS - consensus (I/B/E/S)
0.06 0.06 0.12
0.15 0.15 0.19
0.10 0.10 0.27
0.22 0.22 0.32
Equity income Income taxes Tax rate Net income - operating Non-operating income / (expense)
Balance Sheet and Cash Flow Data
FY09A FY10E FY11E
Cash and cash equivalents Accounts receivable Inventories Current assets
4,244 1,787 3,101 10,446
2,967 2,149 3,350 9,683
3,101 2,282 3,605 10,327
PP&E Goodwill Intangibles Total assets
9,275 3,792 25,714
9,382 3,825 25,681
9,562 3,825 26,821
Short-term debt Current liabilities
2,914 5,877
1,926 5,149
1,930 5,453
Long-term debt Total liabilities
5,884 12,575
5,715 12,118
5,737 12,520
Shareholders' equity
13,135
13,558
14,293
Net Income (including charges) D&A Other adjustments Change in working capital Cash flow from operations
241 806 1,173 3,007
463 807 (255) 887
1,255 886 (208) 1,689
Capex Free cash flow Free cash flow / share
1,198 0 0.00
887 1,005 1.15
1,266 1,121 1.29
894 (5,142) 0.03
(855) (1,310) 0.18
(1,266) (289) 0.36
Cash flow from investing activities Cash flow from financing activities Share buybacks Dividends
Non-operating income / (expense) Net income - reported (GAAP)
Ratio Analysis
FY09A FY10E FY11E FY12E
Reported sales growth organic growth volume change price / mix change FX Other
(5.4%) (5.4%) -
10.0% 10.0% -
9.9% 9.9% -
9.6% 9.6% -
Gross margin SGA / sales EBIT margin EBITDA margin Return on equity (ROE) Return on invested capital (ROIC)
22.6% 2.0% 5.8% 1.8% -
26.8% 6.7% 10.2% 3.4% -
27.2% 8.2% 11.7% 8.8% -
27.2% 13.2% 9.1% -
EBITDA growth EBIT growth Net income growth - operating EPS growth - operating
(47.4%) (71.5%) -
91.5% 268.8% 92.4% 92.4%
26.9% 35.9% 171.0% 171.0%
23.0% 0.0%
Core operating cycle (days) Working capital as % of sales
-
15.2%
14.6%
14.6%
4,554 3.2 20.8%
4,675 1.9 22.1%
4,565 1.5 20.8%
4,467 1.2 19.4%
89.4 19.9 0.8 0.0% 0.1% -
46.5 10.9 1.1 4.7% 0.7% -
17.2 8.6 1.0 5.2% 1.5% -
15.4 7.0 0.9 11.0% 1.6% -
Net debt Net debt / EBITDA Net debt / capital (book) P/E Enterprise value / EBITDA Enterprise value / revenues FCF yield Dividend yield Market Cap / cash earnings CFO / FV
Source: Company reports and J.P. Morgan estimates. Note: R$ in millions (except per-share data). Fiscal year ends Dec
65
Ben Laidler (1-212) 622-5252
[email protected]
Latin America Equity Research November 2010
Overweight
FEMSA
$54.92 (28 Oct 10)
FMX www.femsa.com
Price Target: $59 End Date: Dec 2011
A consumer conglomerate FEMSA (FMX) is a holding company with three major investments: (a) 100% ownership of Oxxo, a chain of +8k convenience stores in Mexico that is among the fastest-growing and most profitable retailers in the region. (b) 54% ownership and full management control of Coca-Cola FEMSA (KOF), the largest Coke bottler in Latin America. KOF sells Coke products in nine Latin American countries – including Mexico and Brazil – for the equivalent of what would be more than 1 out of 10 Coke products in the world. (c) 20% ownership of Heineken, a leading global beer company. At a very attractive discount to the sum of its parts FMX’s valuation gets a deep discount for its corporate structure. We believe this is unmerited and unsustainable. Both Heineken and KOF are listed, so taking their current prices, we see Oxxo with an implied EV/EBITDA multiple of only 7x. This is half the current valuation of Walmex, Mexico’s leading retailer. Yet Oxxo has faster growth, better margins and more scale versus its competitors. Furthermore, Oxxo keeps opening stores at a pace of almost 3 per day. Working capital of the business is a beauty – all they sell is cash, all they buy is on credit. Payback for store investments is ~ 3 years. From a net cash position, FMX balance sheet is getting even stronger We expect dividends coming from Heineken to increase, as well as those coming from KOF. On top of that, Oxxo should continue to grow and expand its margins regardless of the economic scenario.
Latin America Food, Beverage and Tobacco Alan Alanis AC (1-212) 622-3697
[email protected] J.P. Morgan Securities LLC Bloomberg JPMA ALANIS <GO>
Price Performance 56 52 $ 48 44 40 Oct-09
Jan-10
Apr-10
Jul-10
1M
3M
Oct-10
Source: Bloomberg.
Performance Absolute
3%
13%
12M 22%
Source: Bloomberg.
Catalysts include higher dividends and continued growth FMX (ex-KOF) is already sitting on +$500mn of net cash. So absent any large acquisition, shareholders of FMX have material upside risk on dividends (currently 2% for ’11e). Also, we see room for multiple expansion if KOF resumes double-digit growth next year. Price target and risks Our PT for FMX is based on the PT of Heineken (rated N by JPM European beverages analyst Mike Gibbs), our Dec 11 PT of $79 for KOF, and a 14x ’11e EBITDA for Oxxo (similar to Walmex’s historical average). We apply a 10% holdco discount to obtain a Dec ’11 PT of $59. Key risks are macro, particularly around Fx. Also, volatility of Heineken and KOF stock prices.
Overweight Company Data Price ($) Date Of Price 52-week Range ($) Mkt Cap ($ mn) Fiscal Year End Shares O/S (mn) Price Target ($) Price Target End Date
66
FEMSA (FMX;FMX US) 52.92 28 Oct 10 55.50 39.74 18,935.97 Dec 358 59.00 31 Dec 11
EPS Reported FY ($) P/E Majority FY EBITDA FY ($ mn) EV/EBITDA FY
2009A 2.11 26.0 2,736 7.0
Source: Company data, Bloomberg, J.P. Morgan estimates.
2010E 2.90 18.9 2,462 8.8
2011E 3.38 16.2 2,529 7.8
2012E
Ben Laidler (1-212) 622-5252
[email protected]
Latin America Equity Research November 2010
FEMSA: Summary of Financials Income Statement
FY09A
Revenues Cost of goods sold SG&A Operating Profit (EBIT) EBIT Margin Depreciation EBITDA EBITDA margin Net Interest FX Gains (Losses) Monetary gains (losses) Other Nonoperarting income EBT Taxes Minority interest Extraordinary Net income
14,506 14,266 14,826 (7,816) (8,170) (8,662) (4,695) (4,195) (4,157) 1,995 1,901 2,006 13.8% 13.3% 13.5% 741 560 523 2,736 2,462 2,529 18.9% 17.3% 17.1% 1,403 1,850 1,946 (441) (443) (490) 962 1,408 1,456
Number of ADRs (million) EPADS
358 2.11
FY10E FY11E FY12E Balance Sheet
358 2.90
358 3.38
Revenue growth EBITDA growth Gross Profit growth
(0.9%) (1.7%) (1.7%) (10.0%) (1.2%) (8.9%)
3.9% 2.7% 1.1%
Operating Data, Ratios
FY09A
Capex Change in working capital Free cash flow
(1,012) 217 908
(713) (64) 1,191
(680) (120) 1,180
Cash from Operating Activities
1,920
1,904
1,859
Cash from Investing Activities
(1,012)
(713)
(680)
Cash from Financing Activities
302
(1,058)
(495)
Net change in cash Net cash at Beginning Net Cash at End
1,210 697 1,907
133 1,357 1,489
685 2,383 3,068
Dividends Dividend % of net income Capex/depreciation CAPEX/sales Working capital Working capital/sales
(124) 12.9% 1.4 7.0% 287 2.0%
(200) (294) 14.2% 20.2% 1.3 1.3 5.0% 4.6% 1,945 2,979 13.6% 20.1%
-
Cash Accounts receivable Inventories Other current assets Net PP&E Goodwill Other assets Total assets
Short-term debt Accounts payable Other current liabilities Long-term debt Pension plan and seniority premium Other liabilities Total liabilities Minority interest Shareholders' equity - Liabilities + Equity -
- Net debt - Net Debt/Equity Net Debt/Capital Net Debt/Annualized EBITDA
FY10E FY11E FY12E Valuation, Macro
- EV/EBITDA - P/E - P/BV P/S - FCF yield Dividend yield - ROE Net income margin Net revenue/Assets Assets/Equity - ROIC -
FY09A FY10E
FY11E FY12E
1,350 2,475 901 443 1,137 720 366 393 5,326 3,211 1,679 737 16,160 11,964
3,349 471 812 425 3,457 1,003 13,354
-
678 207 2,777 1,867 13 13 2,585 1,520 257 133 13 13 7,293 5,081 8,867 11,701 16,160 16,782
178 1,886 14 1,300 131 14 4,781 13,213 17,994
-
1,912 (749) (1,870) 21.6% (6.4%) (14.2%) 15.8% (5.6%) (12.7%) 0.7 (0.3) (0.7)
-
FY09A FY10E 7.0 20.8 2.1 1.3 5.0%
FY11E FY12E
8.8 13.6 1.6 1.3 6.5%
7.8 11.9 1.4 1.2 6.5%
10.7 -
0.6% 1.0% 10.8% 12.0% 6.6% 9.9% 0.9 1.2 1.8 1.0 12.8% 13.3%
1.5% 11.0% 9.8% 1.1 1.0 15.5%
-
DCF Assumptions WACC Perpetual Growth Cost of equity Cost of debt
Source: Company reports and J.P. Morgan estimates. Note: $ in millions (except per-share data). Fiscal year ends Dec
67
Ben Laidler (1-212) 622-5252
[email protected]
Latin America Equity Research November 2010
Minerva
Neutral
BEEF3.SA www.minerva.com
Price Target: R$8.10
R$6.14 (28 Oct 10)
End Date: Dec 2011
A sophisticated Brazilian exporter of beef Minerva (BEEF3) is the 3rd-largest beef producer in Brazil, with a slaughtering capacity of ~9k head/day in 10e. It’s a pure beef player that gets 70% of its revenues from exports. Minerva’s main products are fresh and processed beef, but the company is also Brazil’s largest live cattle exporter. Meat packers are seeing profit margin compression International beef prices are increasing, but not at the same pace as rising cattle prices. In fact, Brazilian cattle prices are now more expensive than in the US and Australia, the other two big players in the international beef market. Also, we don’t see much space for beef producers to increase prices domestically to protect margins as the beef price premium over chicken is above the historical average. Substitution toward poultry may accelerate. Hence we have a bearish view on the overall beef sector. This industry outlook leads us to believe that BEEF3 should be a stock to avoid in ’11, despite its professional and sophisticated management team. Volatility of earnings may continue Minerva’s involvement in complex financial instruments such as derivative hedges clouds earning estimates. Thus, consensus EPS estimates vary by orders of magnitude. At +4x net debt to EBITDA, Minerva is among the most levered companies in LatAm staples. We see limited potential for earnings upgrades, as these are likely to remain volatile for this producer of meat as a commodity (low-margin business).
Latin America Food, Beverage and Tobacco Alan Alanis AC (1-212) 622-3697
[email protected] J.P. Morgan Securities LLC Bloomberg JPMA ALANIS <GO>
Price Performance 7.5 R$
6.5 5.5 Oct-09
Jan-10
Apr-10
Jul-10
Oct-10
Source: Bloomberg.
Performance Absolute (%)
1M
3M
12M
-11%
-10%
1%
Source: Bloomberg.
It may take many consistent (good) quarters for rerating up At 6x ’11e EV/EBITDA and 9x ’11e P/E Minerva looks inexpensive (thus our Neutral rating); but it is likely to remain that way, in our view. There is downside risk to its margins due to continued high cattle prices. Its lack of operating leverage gives limited scope for rerating. Dec. ’11 PT offers nice upside, but with high risks – Remain N Using perpetuity growth of 3% and a WACC of 10.7%, our DCF model indicates a Dec 11 PT of R$8.1 for BEEF3, implying ~30% upside. This apparent high return poses high risks, thus our relative skepticism. Furthermore, outstanding warrants (BEEF11) likely to be exercised would be dilutive. Add to macro and Fx risks, other risks inherent to the meat packing industry, such as changes in trade restrictions and further sector consolidation.
Neutral Company Data Price (R$) Date Of Price 52-week Range (R$) Mkt Cap (R$ mn) Fiscal Year End Shares O/S (mn) Price Target (R$) Price Target End Date
68
Minerva SA (BEEF3.SA;BEEF3 BZ) 6.14 28 Oct 10 7.92 - 5.31 649.23 Dec 106 8.10 31 Dec 11
EBITDA FY (R$ mn) Revenues FY (R$ mn) EV/EBITDA FY P/E FY EPS Reported FY (R$)
2009A 182 2,602 9.4 6.2 1.00
Source: Company data, Bloomberg, J.P. Morgan estimates.
2010E 238 3,435 7.2 NM (0.08)
2011E 282 4,011 6.1 9.0 0.69
2012E 324 4,544 7.4 0.83
Ben Laidler (1-212) 622-5252
[email protected]
Latin America Equity Research November 2010
Minerva SA: Summary of Financials Income Statement - Annual Revenues Cost of goods sold Gross profit
FY09A FY10E FY11E
Income Statement - Quarterly
2,602 (2,132) 470
3,435 (2,769) 666
4,011 (3,233) 778
(329) 141
(467) 199
(536) 242
LFL EBITDA
182
238
282
Interest, net
(68)
(186)
(100)
73
1
123
7 10.0%
0 0.0%
(30) 24.0%
-
-
-
Net income - operating Non-operating income / (expense)
SG&A LFL Operating income
Pretax income Equity income Income taxes Tax rate Net income - operating Non-operating income / (expense)
-
-
-
81
1
94
Diluted shares outstanding
105
135
EPS (LFL) EPS - reported (GAAP) EPS - consensus (I/B/E/S)
1.00 1.00
(0.08) 0.16
Net income - reported (GAAP)
Balance Sheet and Cash Flow Data
744 (611) 133
888 (711) 177
893 (718) 175
909 (729) 180
(92) 41
(124) 53
(124) 51
(127) 54
54
62
60
63
Interest, net
(65)
(67)
(30)
(24)
Pretax income
(23)
(17)
17
25
Equity income Income taxes Tax rate
0 0.0%
0 0.0%
0 0.0%
0 0.0%
-
-
-
-
Other operating expenses Operating income EBITDA
-
-
-
-
(23)
(17)
17
25
135
Diluted shares outstanding
105
106
135
135
0.69 0.57
EPS (LFL) EPS - reported (GAAP) EPS - consensus (I/B/E/S)
(0.22) 0.09
(0.16) 0.12
0.12 0.15
0.18 0.11
FY09A FY10E FY11E 424 199 270 1,216
682 189 281 1,553
583 216 320 1,577
PP&E Goodwill Intangibles Total assets
765 2,073
849 2,486
909 2,683
-
-
-
1,546
1,800
1,825
Shareholders' equity
527
686
858
Net Income (including charges) D&A Other adjustments Change in working capital Cash flow from operations
81 41 (15) 153
1 39 (69) 0
93 40 (79) 65
Capex Free cash flow Free cash flow / share
(138) -
(123) -
(100) -
Cash flow from investing activities Cash flow from financing activities Share buybacks Dividends
(138) (33) 0.00
(122) 380 0.00
(100) (63) -
Long-term debt Total liabilities
1Q10A 2Q10A 3Q10E 4Q10E
Net income - reported (GAAP)
Cash and cash equivalents Accounts receivable Inventories Current assets
Short-term debt Current liabilities
Revenues Cost of revenues Gross profit
Ratio Analysis
FY09A FY10E FY11E FY12E
Reported sales growth organic growth volume change price / mix change FX Other
22.7% -
32.0% -
16.8% -
13.3% -
Gross margin SGA / sales EBIT margin EBITDA margin Return on equity (ROE) Return on invested capital (ROIC)
18.1% 5.4% 7.0% 15.4% 4.9%
19.4% 5.8% 6.9% 0.1% 6.2%
19.4% 6.0% 7.0% 10.8% 6.6%
19.5% 6.1% 7.1% 11.8% -
EBITDA growth EBIT growth Net income growth - operating EPS growth - operating
18.9% 11.3% -
30.5% 40.9% -
18.6% 21.7% -
14.9% 15.2% 21.0%
Core operating cycle (days) Working capital as % of sales
21.1%
18.0%
17.4%
17.2%
799 -
761 -
820 -
877 -
6.1 9.4 0.7 0.0% -
NM 7.2 0.5 0.0% -
8.8 6.1 0.4 -
7.3 0.4 -
Net debt Net debt / EBITDA Net debt / capital (book) P/E Enterprise value / EBITDA Enterprise value / revenues FCF yield Dividend yield Market Cap / cash earnings CFO / FV
Source: Company reports and J.P. Morgan estimates. Note: R$ in millions (except per-share data). Fiscal year ends Dec
69
Latin America Equity Research November 2010
Recommendations PDG is the top pick among the BZ HB as its earnings have upside potential on the back of the Agre acquisition. Geo is our top pick among the MX HB given its strong growth and potential improvement in margins. We recommend that investors avoid Cyrela given current uncertainties about future results. 70
300
BZ HB index
17.0
Selic
250
15.0
200
13.0
150
11.0
100
9.0
-
7.0 May-06 Aug-06 Nov-06 Feb-07 May-07 Aug-07 Oct-07 Feb-08 Apr-08 Jul-08 Oct-08 Jan-09 Apr-09 Jun-09 Sep-09 Dec-09 Mar-10 Jun-10 Aug-10 Nov-10 Jan-11 Mar-11 May-11 Jul-11 Sep-11 Nov-11
50
Source: J.P. Morgan estimates and Bloomberg.
Working capital for MX continues to deteriorate Adj. Cash Conversion Cycle - In Days Geo
500
Homex
Urbi
400 300 200 100 0 1Q08
2Q08
3Q08
4Q08
1Q09
2Q09
3Q09
4Q09
1Q10
2Q10
3Q10
Source: Company reports.
BZ HB vs IBOV 130
Ibov
BZ HB
120 110 100 90 80 Oct-10
Sep-10
Aug-10
Jul-10
Jun-10
May-10
Mar-10
Apr-10
70 Feb-10
Source: J.P. Morgan estimates and Bloomberg.
MX HB vs Bolsa 120 100 80 60 40
Jul-10
Source: Bloomberg and J.P. Morgan estimates.
* Registered/qualified as a research analyst under NYSE/NASD rules.
Oct-10
Apr-10
Jan-10
Oct-09
Jul-09
Apr-09
Jan-09
Oct-08
Jul-08
Apr-08
Jan-08
20 Oct-07
Drivers of returns – Multiples and growth We are not expecting multiple expansion in Brazil or in Mexico as in both countries companies are trading in line with their 12-month averages (around 10.0-11.0x), so earnings growth will drive the upside, in our view. However, we believe investors could pay a higher multiple in Mexico if the economic outlook improves and in Brazil if companies start to generate cash. Regarding growth, we assume a conservative view for all the companies.
Selic should not have a negative impact on Brazilian homebuilders
Jul-07
Growth characteristics and how they are changing Despite the positive outlook for all income segments in Brazil, given attractive mortgage conditions and pent-up demand, the companies have been increasing their exposure to the lower-income segment to benefit from the government’s housing program and its shorter cycle. In Mexico, the sector is still recovering from the credit crisis, which reduced mortgage availability, especially from Fovissste and banks (which are focused on the middle-income and residential segments). As a result, companies remain focused on the AEL segment and are in fact increasing their exposure further due to its resilient characteristics.
Bloomberg JPMA HUERTA <GO>
Jan-10
Key country dynamics We continue to prefer the Brazilian Homebuilders vs the Mexican names as we expect Brazil’s macroeconomic scenario to continue supporting the sector on the back of positive government participation and a robust growth outlook. Further, we believe the expected tightening in the Selic that could begin in 2011 represents only a marginal adjustment to government monetary policy and is already priced in. Despite cost pressures in Brazil, companies have been able to maintain margins given a positive outlook on housing prices. On the other hand, in Mexico companies are in a transition phase, moving more toward the AEL segment and also entering the informal sector (self employed and informal jobs) where there is high pent-up demand but not much mortgage availability yet. Moreover, the focus is now on free cash flow generation, which is still at question given its WC demands. Revenue growth should remain in the low double digits in the near term.
(52 81) 8152-8720
[email protected] J.P. Morgan Casa de Bolsa, S.A de C.V., J.P. Morgan Grupo Financiero.P. Morgan Securities LLC
Apr-07
Homebuilders
Adrian Huerta AC *
Jan-07
Ben Laidler (1-212) 622-5252
[email protected]
Ben Laidler (1-212) 622-5252
[email protected]
Latin America Equity Research November 2010
Top picks and stocks to avoid Top picks PDG Geo Stocks to avoid Cyrela
P/E (x) 10E
Mkt cap (US$MM)
Price
Code
Rating
R$21.18 Ps39.31
PDGR3 BZ GEOB MM
OW OW
6,874 1,747
14.5 12.2
R$22.80
CYRE3 BZ
UW
5,659
12.2
EPS 10E
11E
Div. yield 11E (%)
ROE 11E (%)
9.4 9.7
1.46 3.23
2.26 4.08
-
19.2% 22.0%
9.9
1.88
2.31
-
20.1%
11E
Source: Bloomberg, J.P. Morgan estimates. Note: Share prices and valuations are as of October 28, 2010.
Homebuilders absolute and relative to MSCI LatAm
Homebuilders EPS integer 170
800
Absolute
Relativ e to MSCI EMF Index
700
2011
160 150
600 500
140
400
130
300
120
200
110
100
100
0
2010
90
Dec-02
Mar-04
May -05
Aug-06
Oct-07
Jan-09
Mar-10
Feb-09
Jul-09
Dec-09
May -10
Source: MSCI, Bloomberg, IBES, Datastream, J.P. Morgan.
Source: MSCI, Bloomberg, IBES, Datastream, J.P. Morgan.
Homebuilders 12 mth fwd PE
Homebuilders trailing PB
18
Oct-10
5 4.5 4 3.5 3 2.5 2 1.5 1 0.5 0
15 12 9 6 3 95
97
98
99
00 PE
01
02
03
04
Av g
Source: MSCI, Bloomberg, IBES, Datastream, J.P. Morgan.
05
06
+1SD
07
08
10
-1SD
95
97
98
99
00 PB
01
02
03
04
Av g
05
06
+1SD
07
08
10
-1SD
Source: MSCI, Bloomberg, IBES, Datastream, J.P. Morgan.
71
Ben Laidler (1-212) 622-5252
[email protected]
Latin America Equity Research November 2010
Corporacion Geo
Overweight
GEOB.MX www.corporaciongeo.com
Price Target: Ps52
Ps39.31 (28 Oct 10)
End Date: Dec 2011
Company description Geo is the largest homebuilder in Mexico, selling more than 56k units per year and focused mainly on lower-income housing, with revenues of more than Ps18 bn in 2009. The company has operations in 17 states and 56 cities. Investment case Geo is our top pick among the MX HB given its strong top-line growth of ~15% and its potential to improve operating margins. Also, the company has made significant progress on its debt profile and maintains the lowest net investment in land, which has helped it to post the highest ROEs among its peers at more than 20%. Potential for earnings upgrades In the 1H10, the company grew more than expected, with revenues +14% yoy vs 8-11% guidance. Further, Geo released a 5-year target growth plan recently, and it expects to build 100K homes by 2015 (12.5% CAGR) and to expand gross margins by 3pp and SG&A by 1pp; however, in our estimates we are only incorporating a 1pp increase in gross margins to be conservative.
Mexico Homebuilders Adrian E Huerta AC * (52 81) 8152-8720
[email protected] J.P. Morgan Casa de Bolsa, S.A de C.V., J.P. Morgan Grupo Financiero Bloomberg JPMA HUERTA <GO>
Price Performance 41 38 Ps 35 32 Oct-09
Jan-10
Performance
Price target and risks We ate Geo Overweight with a Dec-11 price target of Ps52, which is the average of our DCF-based valuation and our GGM-based valuation. The COE of 10.6% is based on a beta of 1.2, country risk of 1.6%, and a risk-free rate of 3.0%, resulting in a WACC of 10.9%. We see lower-than-expected growth in revenues as the main downside risk. The company needs to generate significant FCF in 2H10 in order to be neutral to slightly positive in FCF for the year. Negative FCF for the year likely will be taken negatively by investors.
Source: Bloomberg.
Mkt Cap (Ps mn) Fiscal Year End Shares O/S (mn) Price Target (Ps) Price Target End Date
72
39.31 28 Oct 10 44.60 30.75 21,084.15 Dec 536 52.00 31 Dec 11
Corporacion Geo (GEOB.MX;GEOB MM) 2008A EPS Reported FY (Ps) 2.75 Bloomberg EPS FY (Ps) 3.10 EBITDA FY (Ps mn) 4,119 Revenues FY (Ps mn) 17,453
Jul-10
Oct-10
Source: Bloomberg.
Prospects for re-/derating Despite the company’s robust growth plans, it trades at a discount to peers on P/E basis, given a lower net margin. This should change as Geo executes its growth plans, improves margins and starts to generate positive FCF.
Company Data Price (Ps) Date Of Price 52-week Range (Ps)
Apr-10
1M
3M
Absolute (%)
8
15
12M 9
Relative (%)
2
8
-11
* Registered/qualified as a research analyst under NYSE/NASD rules.
2009A 2.85 3.25 4,401 19,211
2010E 3.23 3.04 4,515 19,821
Source: Company data, Bloomberg, J.P. Morgan estimates. 'Bloomberg' above denotes Bloomberg consensus estimates.
2011E 4.08 3.58 5,201 22,361
Ben Laidler (1-212) 622-5252
[email protected]
Latin America Equity Research November 2010
Corporacion Geo: Summary of Financials Income Statement - Annual
FY08A
FY09A
Net Revenues Cost of goods sold Gross profit Gross margin SG&A Other Operating Expenses EBIT Depreciation EBITDA EBITDA margin, % Financial income Financial expense Other Nonoperating income Equity income EBT Taxes Minority interest Extraordinary Net income Net income margin EPS
17,453 (11,662) 5,791 33.2% (1,672) 2,914 (277) 4,119 23.6% 102 (614) (7) 2,293 (731) (89) 1,473 8.4% 2.75
Net Revenue growth EBITDA growth Net income growth FCF growth
16.5% 10.1% 15.8% 6.8% 1.7% 3.8% (75.2%) (692.1%)
FY10E
FY11E Balance Sheet
19,211 19,821 22,361 Cash (13,135) (13,442) (15,053) Accounts receivable 6,076 6,379 7,308 Inventories 31.6% 32.2% 32.7% Land bank (1,676) (1,864) (2,107) Real Estate & Construction - Others current assets 3,306 3,286 3,893 Net PP&E (276) (456) (503) Other assets 4,401 4,515 5,201 Total Assets 22.9% 22.8% 23.3% ST Loans 124 81 134 Accounts Payables (667) (660) (628) Suppliers (70) (60) (70) Land Payables - Other current liabilities 2,620 2,647 3,329 LT Debt (963) (794) (999) Deffered taxes (107) (119) (140) Other non current liabilities - Total Liabilities 1,529 1,734 2,191 Minority Interests 8.0% 8.7% 9.8% Shareholders Equity 2.85 3.23 4.08 Liabilities and Equity 3.2% 2.6% 13.4% (8.4%)
12.8% 15.2% 26.4% 2.1%
Net debt Net Debt/Equity Debt/Equity NetDebt/EBITDA
Operating Data, Ratios
FY08A
FY09A
FY10E
FY11E Valuation, Macro
Working Capital changes FCFF-firm Dividends Dividend % of net income
(3,763) (247) -
(2,292) 1,461 -
(2,285) 1,337 -
Working capital Working capital/sales Units Avg. price/Unit (Ps '000)
15,996 91.7% 51,879 336
18,288 95.2% 56,559 340
19,214 96.9% 57,443 345
Units chg Avg.price/Unit chg
13% 3%
9% 1%
2% 2%
Days receivable Days inventory adj. (excl. land) Days payable adj. (excl. land) Cash Conversion Cycle Adj. Cash Conversion Cycle
175 327 176 88 63 414 287
188 340 204 107 92 421 300
15 610 471 111 92 515 394
(2,278) EV/EBITDA 1,365 land adj. - P/E land adj. P/BV P/CE 21,492 96.1% FCF yield 62,424 Dividend yield 358 Capex/Revenues Cash Earnings 9% Coverage EBIT/Interest) 4% ROE 15 ROIC 614 Shares 474 115 WACC 92 Perpetual Growth 514 Cost of equity 398 Cost of debt
FY08A FY09A FY10E FY11E 2,578 8,346 10,462 4,852 5,610 731 1,717 919 25,141 4,523 2,812 2,011 801 1,775 2,921 2735.8 1,775 14,821 942 10,320 25,141
3,393 9,877 12,247 4,901 7,346 861 2,010 1,381 30,227 2,660 3,836 3,298 538 1,610 5,587 3616.6 1,610 18,609 1,749 11,618 30,227
4,474 815 22,474 5,131 17,343 1,296 2,050 747 32,382 2,774 4,075 3,375 699 3,055 6,473 4013.6 3,055 21,690 1,487 10,339 32,029
4,252 919 25,307 5,742 19,566 1,296 2,106 747 35,233 2,774 4,735 3,780 955 3,055 6,473 4013.6 3,055 22,350 1,487 12,530 34,880
4,866 52% 79% 118%
4,853 49% 84% 110%
4,773 54% 104% 106%
4,995 45% 84% 96%
FY08A FY09A FY10E FY11E 6.0 6.0 14.5 2.2 7.9
5.4 5.4 14.0 2.1 7.3
5.3 5.3 12.4 12.0 2.4 8.0
4.7 4.7 9.8 9.5 1.9 7.7
(1.2%) 0.0% 3.3% 2,651 6.7
7.0% 0.0% 3.0% 2,865 6.6
6.4% 0.0% 2.5% 2,587 6.8
6.6% 0.0% 2.5% 2,694 8.3
17.1% 15.9% 18.5% 22.0% 21.3% 20.1% 18.8% 16.9% 536 536 536 536 10.9% 4.0% 10.6% 11.2%
-
Source: Company reports and J.P. Morgan estimates. Note: Ps in millions (except per-share data). Fiscal year ends Dec.
73
Ben Laidler (1-212) 622-5252
[email protected]
Latin America Equity Research November 2010
PDG Realty
Overweight
PDGR3.SA www.pdgrealty.com.br
Price Target: R$30
R$21.18 (28 Oct 10)
End Date: Dec 2011
Company description PDG became the largest market cap (around USD6.9bn) company among the BZ HB after acquiring AGRE early in the year, thereby gaining exposure to the mid- and high-income segments and now having exposure to all income segments. The company is geographically diversified, has one of the best management teams among its peers, with a strong focus on cash flows and with management interest aligned with minority shareholders. Investment case We believe that the recent acquisition of AGRE will provide room for stronger top-line growth versus peers’ and will allow the company to deliver one of the highest operating margins in the industry. PDG also offers opportunities to improve AGRE’s lower ROEs through better operating efficiencies and lower financial expenses. Potential for earnings upgrades We believe that the company offers one of the highest potential upsides to earnings given the lack of track record for the combined company as PDG has only reported one quarter consolidating AGRE. We believe investors are still conservative on growth and margin assumptions for PDG. Prospects for re-/derating Currently PDG is trading at 9.4 P/E 11E, in line with Cyrela and Rossi and at a discount to MRV; however, we believe that if margins improve and growth accelerates, it could trade at least in line with MRV’s multiples. Price target and risks We rate PDG Overweight with a Dec-11 price target of R$30, which is the average of our DCF-based valuation and GGM-based valuation. The COE of 11.6% used is based on a beta of 1.3x, country risk of 2.1%, and a risk-free rate of 3.0%, resulting in a WACC of 10.5%. The main risks to our positive view are lower-than-expected synergies from the AGRE acquisition impacting our forecasts on growth and margins resulting in lower-than-expected results. Given its significant exposure to lower income, through Goldfarb, PDG can also be impacted by changes in MCMV policy and CEF execution capabilities.
Brazil Homebuilders Adrian E Huerta AC * (52 81) 8152-8720
[email protected] J.P. Morgan Casa de Bolsa, S.A de C.V., J.P. Morgan Grupo Financiero Bloomberg JPMA HUERTA <GO>
Price Performance 24 20 R$ 16 12 Oct-09
Jan-10
Apr-10
Jul-10
Oct-10
Source: Bloomberg.
Performance Absolute (%)
1M
3M
12M
2
15
51
10
34
Relative (%) Source: Bloomberg.
* Registered/qualified as a research analyst under NYSE/NASD rules.
PDG Realty (PDGR3.SA;PDGR3 BZ) Company Data Price (R$) Date Of Price 52-week Range (R$) Mkt Cap (R$ mn) Fiscal Year End Shares O/S (mn) Price Target (R$) Price Target End Date
74
21.18 28 Oct 10 22.73 12.32 11,675.24 Dec 551 30.00 31 Dec 11
EPS Reported FY (R$) EBITDA FY (R$ mn) P/E FY Revenues FY (R$ mn) Bloomberg EPS FY (R$) Source: Company data, Bloomberg, J.P. Morgan estimates.
2009A 0.87 417 24.4 1,984 0.93
2010E 1.46 1,366 14.5 5,332 1.50
2011E 2.26 1,878 9.4 7,498 2.19
Ben Laidler (1-212) 622-5252
[email protected]
Latin America Equity Research November 2010
PDG Realty: Summary of Financials Income Statement - Annual
FY09A
FY10E
FY11E
FY12E Balance Sheet
Net Revenues Cost of goods sold Gross profit Gross margin SG&A Selling expenses G&A Depreciation EBITDA EBITDA margin, % Financial income Financial expense Other Nonoperating income Equity income EBT Taxes Minority interest Extraordinary Net income Net income margin EPS
1,984 (1,294) 690 29.0% (268) (129) (140) (5) 417 21.0% 79 (27) 21 371 (37) 4 0 338 17.0% 0.87
5,332 (3,253) 2,080 33.0% (713) (316) (397) (43) 1,366 25.6% 230 (210) 0 1,023 (199) (21) 0 803 15.1% 1.46
7,498 (4,724) 2,774 32.0% (886) (424) (462) (60) 1,878 25.0% 203 (106) 0 1,540 (265) (32) 0 1,244 16.6% 2.26
7,883 (4,966) 2,917 32.0% (937) (451) (486) (63) 1,990 25.2% 239 (111) 0 1,661 (278) (35) 0 1,348 17.1% 2.45
Net Revenue growth EBITDA growth Net income growth FCF growth
61.1% 168.8% 40.6% 62.7% 227.7% 37.5% 85.3% 137.5% 54.8% 27.2% 1.3% (64.6%)
5.1% 6.0% 8.4% (514.6%)
Operating Data, Ratios
FY09A
FY10E
FY11E
FY12E Valuation, Macro
Working Capital changes FCFF-firm Dividends Dividend % of net income
(1,439) (1,048) 13.5%
(2,201) (1,062) 10.5%
(1,952) (376) 16.1%
(113) 1,559 23.1%
Working capital Working capital/sales Launches (Co's share) Pre-sales (Co's share) Units Price/M2
3,399 8,692 171.4% 163.0% 3,027 7,000 2,670 6,577 32,129 58,333 158 150
10,644 142.0% 8,400 7,712 67,308 156
10,757 136.5% 9,240 8,201 71,191 162 177 10% 6% 6% 4%
Price/Unit Launches chg Pre-sales chg Units chg Price/M2 chg Days receivable Days inventory Days payable
159 16% 47% 14% (29%)
165 131% 146% 82% (5%)
172 20% 17% 15% 4%
462 473 147
430 427 96
380 340 77
Cash Accounts receivable Inventories Land bank Real Estate & Construction Others current assets Net PP&E Other assets Total Assets ST Loans Accounts Payables Suppliers Land Payables Other current liabilities LT Debt Deffered taxes Other liabilities Total Liabilities Minority Interests Shareholders Equity Liabilities and Equity Net debt Net Debt/Equity Debt/Equity NetDebt/EBITDA
EV/EBITDA P/E P/BV P/CE FCF yield Dividend yield Capex/Revenues Inventory/Revenues Assets/Equity Coverage (EBIT/Interest) ROE ROIC Shares
WACC Perpetual Growth 360 Cost of equity 340 Cost of debt 77
FY09A
FY10E
FY11E
FY12E
1,099 2,509 1,678 1,010 668 177 82 308 6,103 543 788 640 148 165 963 87.8 165 3,142 20 2,961 6,103
723 6,282 3,805 2,205 1,600 617 86 629 13,295 1,833 1,394 292 1,102 362 1,973 51.6 362 7,241 101 6,054 13,295
268 7,806 4,406 2,315 2,091 617 64 629 14,944 2,025 1,568 411 1,157 362 2,181 51.6 362 7,815 133 7,129 14,944
1,250 7,775 4,629 2,431 2,199 617 40 629 16,094 2,025 1,647 432 1,215 362 2,181 51.6 362 7,894 168 8,200 16,094
407 14% 51% 98%
3,083 52% 64% 226%
3,938 56% 60% 210%
2,956 37% 52% 149%
FY09A
FY10E
FY11E
FY12E
15.6 24.4 1.5 -
6.6 14.5 1.0 -
5.3 9.4 0.9 -
4.5 8.7 0.8 -
0.0% 0.0% 0.0% 0.0% 0.6% 0.7% 1.7% 2.7% (0.6%) (0.5%) (0.5%) (0.5%) 84.6% 71.4% 58.8% 58.7% 207.5% 223.3% 213.6% 200.4% 15.3% 12.4% 390
15.0% 12.8% 551
19.2% 15.2% 551
17.9% 14.6% 551
10.5% 3.0% 11.6% 8.6%
Source: Company reports and JPMorgan estimates. Note: R$ in millions (except per-share data). Fiscal year ends Dec
75
Ben Laidler (1-212) 622-5252
[email protected]
Latin America Equity Research November 2010
Cyrela Brazil Realty
Underweight
CYRE3.SA www.cyrela.com.br
Price Target: R$29 End Date: Dec 2011
Company description Cyrela is the second-largest homebuilder in Brazil in market cap and is considered a premium player in the sector given its long track record. The company is a diversified player, acting on the lower-income segment via its “Living” brand, which launched more than 16k units in 2009, representing 40% of its total launches. Cyrela is present in 66 cities and 16 states, having one of best geographic diversifications, with a land bank of R$34.9bn in PSV. Investment case It is our stock to avoid given the lack of good results in 1H10 as the company launched only 24% of full-year guidance vs 40-50% from peers, and also due to weakening margins in recent quarters on the back of higher-than-expected costs. Potential for earnings upgrades We see limited room for positive earnings surprise in the short term, and given its increasing focus on the lower-income segment, margins are not likely to improve from the levels seen in recent quarters. It is important to flag that in the last 3 quarters Cyrela reported higher-than-expected project costs. Prospects for re-/derating Despite its weak results in 1H10 Cyrela is trading in line with peers at 9.9x P/E 11E and 2.3x P/BV. We believe these valuations already reflect a potential recovery in 2H10 and 2011 results. Price target and risks We rate Cyrela Underweight with a Dec-11 price target of R$29, which is the average of our DCF-based valuation and GGM-based valuation. The COE of 11.6% used is based on a beta of 1.30, country risk of 2.1%, and a risk-free rate of 3.0%, resulting in a WACC of 10.3%. The main upside risks to our price target and rating include better-than-expected margins as we are assuming a conservative approach on the name given the weak results in 2Q. We are also not incorporating company launch and presale guidance for 2012, which, if it follows plan, could result in higher-than-expected growth in the coming years.
Company Data Price (R$) Date Of Price 52-week Range (R$) Mkt Cap (R$ mn) Fiscal Year End Shares O/S (mn) Price Target (R$) Price Target End Date
76
22.80 28 Oct 10 26.15 16.58 9,642.37 Dec 423 29.00 31 Dec 11
R$22.80 (28 Oct 10)
Cyrela Brazil Realty (CYRE3.SA;CYRE3 BZ) 2009A EPS Reported FY (R$) 1.73 EBITDA FY (R$ mn) 921 P/E FY 13.2 Revenues FY (R$ mn) 4,088 Bloomberg EPS FY (R$) 1.70 Source: Company data, Bloomberg, J.P. Morgan estimates.
Brazil Homebuilders Adrian E HuertaAC (52 81) 8152-8720
[email protected] J.P. Morgan Casa de Bolsa, S.A de C.V., J.P. Morgan Grupo Financiero Bloomberg JPMA HUERTA <GO>
Price Performance 24 R$
20 16 Oct-09
Jan-10
Apr-10
Jul-10
Oct-10
Source: Bloomberg.
Performance 1M
3M
Absolute (%)
-8
-2
12M 7
Relative (%)
-9
-7
-10
Source: Bloomberg.
* Registered/qualified as a research analyst under NYSE/NASD rules.
2010E 1.88 1,101 12.2 5,215 1.81
2011E 2.31 1,374 9.9 6,150 2.24
2012E 2.56 1,449 8.9 6,461 2.83
Ben Laidler (1-212) 622-5252
[email protected]
Latin America Equity Research November 2010
Cyrela Brazil Realty: Summary of Financials Income Statement - Annual
FY09A
FY10E
FY11E
FY12E Balance Sheet
FY09A
FY10E
FY11E
FY12E
Net Revenues Cost of goods sold Gross profit Gross margin SG&A Selling expenses G&A Depreciation EBITDA EBITDA margin, % Financial income Financial expense Other Nonoperating income Equity income EBT Taxes Minority interest Extraordinary Net income Net income margin EPS
4,088 (2,639) 1,449 34.5% (572) (291) (281) (36) 921 22.5% 211 (225) 111 941 (73) (98) 0 729 17.8% 1.73
5,215 (3,384) 1,830 33.8% (763) (412) (351) (52) 1,101 21.1% 303 (237) 5 1,054 (130) (104) 0 793 15.2% 1.88
6,150 (3,966) 2,183 34.0% (875) (461) (414) (61) 1,374 22.3% 347 (265) 5 1,308 (147) (123) 0 975 15.9% 2.31
6,461 (4,168) 2,294 33.5% (914) (485) (430) (65) 1,449 22.4% 394 (224) 5 1,431 (154) (129) 0 1,081 16.7% 2.56
Cash Accounts receivable Inventories Land bank Real Estate & Construction Others current assets Net PP&E Other assets Total Assets ST Loans Accounts Payables Suppliers Land Payables Other current liabilities LT Debt Deffered taxes Other liabilities Total Liabilities Minority Interests Shareholders Equity Liabilities and Equity
1,666 4,917 3,362 2,256 1,106 293 241 60 10,551 392 306 292 306 1,948 2,231 177.5 1,948 6,445 253 4,105 10,551
1,002 6,429 3,856 2,579 1,276 402 276 72 12,049 537 464 357 464 2,302 2,337 194.9 2,302 7,239 339 4,810 12,049
1,882 6,739 4,055 2,708 1,346 402 282 72 13,444 574 542 421 542 2,394 2,499 204.7 2,394 7,735 462 5,710 13,444
3,036 6,550 4,258 2,844 1,415 402 288 72 14,620 574 569 443 569 2,489 2,499 214.9 2,489 7,944 591 6,676 14,620
Net Revenue growth EBITDA growth Net income growth FCF growth
43.6% 27.6% 98.4% 19.6% 162.7% 8.8% 358.5% (62.9%)
17.9% 24.8% 22.9% (258.4%)
5.1% 5.5% 10.8% 56.3%
Net debt Net Debt/Equity Debt/Equity NetDebt/EBITDA
957 25% 68% 104%
1,871 42% 64% 170%
1,192 23% 59% 87%
37 1% 51% 3%
Operating Data, Ratios
FY09A
FY10E
FY11E
FY09A
FY10E
FY11E
FY12E
Working Capital changes FCFF-firm Dividends Dividend % of net income
(2,072) (1,413) 0 0.0%
(1,429) (524) 0 0.0%
(276) 830 0 0.0%
12.5 13.5 0.9 -
11.2 12.4 0.8 -
8.4 10.1 0.7 -
7.1 9.1 0.6 -
Working capital Working capital/sales Launches (Co's share) Pre-sales (Co's share) Units Price/M2
7,973 195.0% 4,465 4,088 26,417 0
9,820 188.3% 5,450 5,032 40,370 0
Price/Unit Launches chg Pre-sales chg Units chg Price/M2 chg
207 18% 18% -
195 22% 23% -
203 15% 14% -
Days receivable Days inventory Days payable
439 465 227
450 416 197
400 373 179
FY12E Valuation, Macro 130 1,297 0 0.0%
EV/EBITDA P/E P/BV P/CE
10,252 10,239 FCF yield 166.7% 158.5% Dividend yield 6,268 6,894 Capex/Revenues 5,720 6,274 Inventory/Revenues 44,640 47,216 Assets/Equity 0 0 Coverage (EBIT/Interest) 209 10% 10% -
ROE ROIC Shares
WACC Perpetual Growth 370 Cost of equity 373 Cost of debt 178
(13.1%) (4.9%) 7.7% 12.0% 0.0% 0.0% 0.0% 0.0% (3.9%) (1.1%) (1.1%) (1.1%) 82.2% 73.9% 65.9% 65.9% 273.8% 269.5% 256.2% 240.3% 3.7 4.2 4.6 5.6 24.4% 11.3% 422
19.1% 11.6% 423
20.1% 12.4% 423
19.1% 11.8% 423
10.3% 3.0% 11.6% 8.1%
Source: Company reports and J.P. Morgan estimates. Note: R$ in millions (except per-share data). Fiscal year ends Dec.
77
Latin America Equity Research November 2010
Metals & Mining Key sector dynamics The key themes for the metals and mining sector in 2011 should be (1) the outlook for China’s commodity demand, (2) the pace of global economic growth, (3) industry fundamentals, and (4) government regulations. China remains the center stage of global commodity demand and should be strong in 2011 (partially offsetting weakness in the developed world) – it should announce its 12th 5-year plan in 1Q11, which our China economist believes will re-emphasize its commitment to urbanization and infrastructure development. The outlook for different subsectors appears to be mixed, and we believe iron ore and copper will be outperformers in 2011 as their supply remains tight relative to steel, which should continue to be in gross overcapacity. Finally, government regulations should be a source of noise, especially for the miners, but further clarity should ease concerns. Growth characteristics and how they are changing Given J.P. Morgan expects the global economy to grow at 3.0% in 2011, the sector should continue to build on the growth shown in 2010. However, we highlight two key points: (1) Emerging economies should grow at a faster rate compared to the developed ones (5.8% vs. 1.9%), led by China (9.0%); and (2) The growth should be relatively moderate compared to 2010e. Drivers of returns – Multiples and growth We believe the main drivers of returns will be both sector/stock rerating/derating as well as changing earnings expectations for the different subsectors. We highlight steel as a sector in whixh we see risks of downward revision of earnings, and a potential derating as the industry could stabilize at a lower normal given slower recovery in demand as well as weaker margins. Iron ore and copper, on the other hand, should benefit from both upward revision of estimates and a potential rerating, mainly as the overhang of government influence eases as more clarity emerges on regulations. Recommendations Within miners, we recommend Vale (OW) and Grupo Mexico (OW) as the best vehicles to gain exposure to iron ore and copper, respectively, our favored commodities. We remain cautious on the steel sector, especially Brazilian flat steels, and see Usiminas (UW) as the most exposed to (1) the deteriorating pricing environment, and (2) higher raw material costs that we do not expect to subside meaningfully until 2014.
78
Rodolfo R. De Angele, CFA AC (55-11) 3048-3888
[email protected] Banco J.P. Morgan S.A. Bloomberg: JPMA ANGELE <GO>
Global GDP should grow by 3.0% in ’11, driven by EMs, especially China 10% 8% 6%
% YoY
Ben Laidler (1-212) 622-5252
[email protected]
10%
4%
9%
7%
2%
4%
6% 3%
2%
2%
0% 2010 Global
2011
Dev eloped markets
Emerging markets
China
Source: J.P. Morgan estimates.
World steel capacity utilization remains much below pre-crisis peak of 91%, even though production is close to pre-crisis levels Global steel output
130
World steel capacity utilization
100%
120
90%
110 100
80%
90
70%
80
60%
70 60
50% Jan-08 Apr-08 Jul-08 Oct-08 Jan-09 Apr-09 Jul-09 Oct-09 Jan-10 Apr-10 Jul-10
Source: Bloomberg.
Brazilian flat-steel imports have stabilized at high levels Flat-steel imports (LHS)
500
Imports as a % of Apparent Consumption
35% 30%
400
25%
300
20%
200
15% 10%
100
5%
0
0%
Jan-05 Jul-05 Jan-06 Jul-06 Jan-07 Jul-07 Jan-08 Jul-08 Jan-09 Jul-09 Jan-10 Jul-10
Source: SECEX/MDIC, IAB (Brazilian Steel Institute) and J.P. Morgan.
In valuation terms, miners remain at a discount to the steelmakers 15.8 12.1
11.4 7.5
8.6
7.6
6.9
9.2 5.9
2010E
6.1
5.2
5.1
2011E
Latam Steel
Global Steel
Latam Mining ex -Precious
Global Mining ex -Precious
Latam Precious Metals
Global Precious Metals
Source: J.P. Morgan estimates.
Ben Laidler (1-212) 622-5252
[email protected]
Latin America Equity Research November 2010
Top picks and stocks to avoid Top picks Vale Grupo Mexico Stocks to avoid Usiminas
Price
Code
Rating
$31.80 Ps40.44
VALE GMEXICOB
OW OW
R$20.96
USIM5
UW
P/E (x) 10E
11E
EPS 10E
11E
Div. yield 11E (%)
ROE 11E (%)
163,216 25,453
10.2 17.5
7.4 10.9
2.92 0.19
4.13 0.30
3.0 5.1
23.3 24.6
12,386
21.2
12.1
1.02
1.88
2.95.4
xx.xx
Mkt cap (US$MM)
Source: Bloomberg, J.P. Morgan estimates. Note: Share prices and valuations are as of October 28, 2010. Vale price refers to ONs. Price for PNs was $28.29.
Metals & Mining absolute and relative to MSCI LatAm
Metals & Mining EPS integer 160
1200
Absolute
Relativ e to MSCI EMF Index
1000
2011
150 140 130
800
2010
120
600
110 100
400
90
200
80
0
70
Dec-02
Mar-04
May -05
Aug-06
Oct-07
Jan-09
Mar-10
Source: MSCI, Bloomberg, IBES, Datastream, J.P. Morgan.
Feb-09
Jul-09
Dec-09
May -10
Oct-10
Source: MSCI, Bloomberg, IBES, Datastream, J.P. Morgan.
Metals & Mining trailing PB
Metals & Mining 12 mth fwd PE 18
4 3.5
15
3
12
2.5 2
9
1.5 1
6
0.5
3
0
95
97
98
99
00 PE
01
02
03
04
Av g
Source: MSCI, Bloomberg, IBES, Datastream, J.P. Morgan.
05
06
+1SD
07
08
10
-1SD
95
97
98
99
00 PB
01
02
03
04
Av g
05
06
+1SD
07
08
10
-1SD
Source: MSCI, Bloomberg, IBES, Datastream, J.P. Morgan.
79
Ben Laidler (1-212) 622-5252
[email protected]
Latin America Equity Research November 2010
Grupo Mexico
Overweight
GMEXICOB.MX www.gmexico.com
Price Target: Ps53
Ps40.44 (28 Oct 10)
End Date: Dec 2011
Company description Grupo Mexico is one of the largest copper producers in globally, and has copper operation in Mexico, Peru and the US through its subsidiaries SCCO (80%) and Asarco (100%). The company has a $5.6B expansion plan in place that should increase its copper capacity by ~600kt to over 1.5Mtpy. It also has railroad operations in Mexico and controls a leading market share through its two subsidiaries Ferromex (56%) and Ferrosur (75%). Investment case We remain bullish on copper prices and see GMex as a unique copper growth story with large capex expansions in regions with relatively stable business environments. In addition, we view Asarco as a hidden asset in GMex’s portfolio, especially with copper above $8,000/t. Finally, GMex trades at a 31% discount to its NAV, which is unwarranted, in our view, and we believe it should trade at a ~15% discount that incorporates any concerns related to the “holding” nature of the company. Trading at 5.4x ’11e EBITDA, it remains cheap vs. SCCO at 8.9x and peers at 5.7x. Potential for earnings upgrades We remain 4% above consensus on ’11e EBITDA and believe consensus should move up as we see more upgrades on copper price assumptions. Prospects for re-/derating We see multiple potential catalysts for rerating of GMex shares over the next 12 months – a SCCO-Asarco merger and the IPO of the railroad business, which should bring transparency to GMex valuation. On the other hand, potentially any significant increase in hedging of copper production may cause a derating as investors may not get the desired exposure to copper prices.
Mexico Metals & Mining Rodolfo R. De Angele, CFA AC (55-11) 3048-3888
[email protected] Banco J.P. Morgan S.A. Bloomberg: JPMA ANGELE <GO>
Price Performance 42 38 Ps 34 30 26 Oct-09
Jan-10
Apr-10
Jul-10
Oct-10
Source: Bloomberg.
Performance 1M
3M
12M
Absolute (%)
12.1
22.4
24.8
Relative (%)
4.9
11.8
17.4
Source: Bloomberg. Note: Prices as of close on 28th October, 2010. Performance in USD relative to Mexican Bolsa.
Price target and risks We base our price target and OW rating on GMex on an SOTP analysis – Dec’11 PT of Ps53.0 ($4.32/sh at JPMe FX rate for end-11 of Ps12.25/USD), assuming a holding company discount of 15%. The main downside risks are (1) weaker copper and moly prices; (2) appreciation of USD vs. MXN or PEN; (3) slower global growth, especially China; (4) recurrence of mining strikes; and (5) revocation of railroad concessions, weaker domestic economy, etc.
Company Data Price (Ps) Date Of Price 52-week Range (Ps) Mkt Cap (Ps mn) Fiscal Year End Shares O/S (mn) Price Target (Ps) Price Target End Date
80
40.44 28 Oct 10 42.00 25.52 314,825.40 Dec 7,785 53.00 31 Dec 11
Grupo Mexico (GMEXICOB.MX;GMEXICOB MM) 2009A EPS - Recurring FY ($) 0.12 Revenues FY ($ mn) 4,785 EBITDA FY ($ mn) 2,126 EV/EBITDA FY 16.3 P/E FY 28.8 Source: Company data, Bloomberg, J.P. Morgan estimates.
2010E 0.18 7,981 3,768 8.2 17.5
2011E 0.30 10,599 5,588 5.4 10.9
2012E 0.40 12,828 7,323 4.1 8.1
Ben Laidler (1-212) 622-5252
[email protected]
Latin America Equity Research November 2010
Grupo Mexico: Summary of Financials Income Statement
FY09A
FY10E
FY11E FY12E
FY13E
Balance Sheet
FY09A FY10E FY11E FY12E
FY13E
Revenues COGS ex D&A SG&A Depreciation EBITDA EBITDA margin Financial income Financial expense FX & Monetary gains (losses) Other Nonoperarting income Equity income EBT Taxes Minority interest Extraordinary Net income Net Income Recurring Net income margin (recurring) EPS EPS Recurring
4,785 (2,519) (140) (407) 2,126 44.4% 91 (130) 0 10 0 1,689 (559) (165) (80) 886 965 20.2% 0.11 0.12
7,981 (4,012) (201) (590) 3,768 47.2% 62 (302) 0 (11) 0 2,927 (1,045) (458) 28 1,452 1,424 17.8% 0.19 0.18
10,599 (4,740) (270) (628) 5,588 52.7% 168 (341) 0 35 0 4,822 (1,760) (750) 26 2,338 2,312 21.8% 0.30 0.30
12,828 (5,178) (327) (648) 7,323 57.1% 168 (349) 43 0 6,536 (2,386) (1,017) 27 3,160 3,133 24.4% 0.41 0.40
14,897 (5,998) (380) (707) 8,519 57.2% 168 (319) 50 0 7,711 (2,815) (1,200) 29 3,726 3,697 24.8% 0.48 0.47
Cash Accounts receivable Inventories Other current assets Total Current Assets Net PP&E Other assets Total assets Accounts payable Other current liabilities Total Current Liabilities Long-term debt Deferred taxes Other liabilities Total liabilities Minority Interests Shareholders' equity Liabilities + Equity
1,335 628 825 688 3,475 5,698 2,394 11,567 570 0 906 1,476 2,848 0 798 5,122 1,390 5,055 11,567
4,093 800 600 589 6,081 6,864 1,624 14,570 211 0 1,359 1,570 3,852 0 1,817 7,239 1,429 5,902 14,570
4,929 987 701 727 7,344 7,547 2,005 16,897 240 0 1,678 1,917 4,375 0 2,243 8,536 1,429 6,932 16,897
4,987 1,195 766 880 7,828 8,226 2,427 18,480 219 0 2,031 2,250 4,006 0 2,715 8,971 1,429 8,080 18,480
5,518 1,388 887 1,022 8,815 8,737 2,818 20,370 211 0 2,358 2,569 3,850 0 3,152 9,571 1,429 9,369 20,370
66.8% 32.8% 77.3% 48.3% 63.9% 61.0% (410.3%) (44.4%)
21.0% 31.0% 35.2% 48.1%
16.1% 16.3% 17.9% 23.5%
Net debt Net Debt/Capital Debt/Capital Net Debt/EBITDA
2,083 24.6% 40.3% 1.0
(30) (0.3%) 40.8% (0.0)
(314) (2.7%) 40.0% (0.1)
(761) (1,457) (6.2%) (10.8%) 34.3% 30.2% (0.1) (0.2)
FY11E FY12E
FY13E
Valuation, Macro
Revenue growth EBITDA growth Net income growth FCF growth
(19.5%) (25.6%) (17.3%) (186.1%)
Operating Data, Ratios
FY09A
FY10E
Capex Change in working capital Free cash flow Dividends Dividend % of net income Capex/depreciation CAPEX/sales Working capital Working capital/sales
599 1,170 (1,371) 445 50.3% 1.5 12.5% 1,354 28.3%
719 (547) 4,255 764 52.6% 1.2 9.0% 807 10.1%
1,311 150 2,366 1,308 55.9% 2.1 12.4% 957 9.0%
1,327 110 3,505 2,012 63.7% 2.0 10.3% 1,067 8.3%
1,218 170 4,329 2,436 65.4% 1.7 8.2% 1,236 8.3%
507 9,438 4,969 4,192
482 16,570 8,329 7,823
645 16,441 7,353 8,669
775 16,559 6,684 9,453
1,024 14,541 5,855 8,316
Shipments Avg price/t Cash COGS/t EBITDA/t Shipments chg Avg price/t chg Cash COGS/t chg EBITDA/t chg
0.3% (19.8%) (13.7%) (25.8%)
(5.0%) 33.8% 75.6% (0.8%) 67.6% (11.7%) 86.6% 10.8%
20.2% 32.2% 0.7% (12.2%) (9.1%) (12.4%) 9.0% (12.0%)
Capex Maintenance
599 176
719 327
1,311 271
1,327 311
1,218 384
Expansion
423
392
1,040
1,015
834
Short-term debt
EV/EBITDA P/E P/BV EV/tonne FCF yield Dividend yield ROE Net income margin Net revenue/Assets Assets/Equity ROIC Shares ADRs WACC Perpetual Growth Cost of equity Cost of debt
FY09A FY10E FY11E FY12E 16.3 26.4 5.0 4,386 (0.4%) 1.7% 17.5% 20.2% 41.4% 2.3 11.7% 7,785 -
8.2 17.9 53.3 4,267 1.4% 3.0% 24.6% 17.8% 54.8% 2.5 18.0% 7,785 -
5.4 11.0 45.4 3,136 0.8% 5.1% 33.7% 21.8% 62.7% 2.4 24.3% 7,785 -
4.1 8.1 39.0 2,565 1.1% 7.9% 39.1% 24.4% 69.4% 2.3 30.9% 7,785 -
FY13E 3.4 6.9 33.6 1,889 1.4% 9.6% 39.8% 24.8% 73.1% 2.2 33.4% 7,785 -
9.9% 3.0%
Source: Company reports and J.P. Morgan estimates. Note: $ in millions (except per-share data). Fiscal year ends Dec.
81
Ben Laidler (1-212) 622-5252
[email protected]
Latin America Equity Research November 2010
Vale
Overweight
VALEp www.vale.com
Price Target (PN): $41.50
PN $28.29 (28 Oct 10)
End Date: Dec 2011
Company description The world’s 2nd-largest miner, largest iron ore producer, and 2nd-largest nickel producer also produces manganese, alloys, thermal & coking coal, bauxite, alumina, aluminum, copper, cobalt, fertilizers. Most operations are in Brazil, with presence in Canada (Inco), other LatAm, Africa, Indonesia, China. Investment case We remain bullish iron ore and China commodity demand. Given Vale’s costleadership, reserve quality and expected growth, we believe it is best leveraged to benefit from this tightness. The current share price fails to capture the potential, in our view. Our model suggests the current share price implies $53/t (FOB Brazil) for fines; low vs a current and YTD average of ~$120/t. At 4.9x ’11e EBITDA, Vale is cheap vs. respective historical and peer averages of 6.8x and 5.6x, and more than discounts higher capex and royalties/taxation concern. Potential for earnings upgrades Iron ore market remains very tight, and given the steep cost curve, marginal increase in demand can lift prices sharply and, in our view, presents the biggest potential for earnings upgrades. Similarly, higher prices for other commodities could add similar upside risks, and vice versa. Prospects for re-/derating Vale could rerate if concerns related to a slowdown in the global economy (double dip) mitigate and/or investor optimism on China demand improves further (announcement of China’s 12th 5-year plan could reinforce this). In addition, detailed disclosure of Vale’s capex plan as well as clarity on new regulations for the industry should help by removing potential overhangs. If these concerns continue or become more widespread, the stock may derate.
Brazil Metals & Mining Rodolfo R. De Angele AC (55-11) 3048-3888
[email protected] Banco J.P. Morgan S.A. Bloomberg JPMA ANGELE <GO>
Price performance (PN - US$) 32 28 24 20 16 Oct-09
Feb-10
Jun-10
Oct-10
Source: Bloomberg
Performance
1M
3M
12M
Absolute (%)
4.3
17.5
32.3
Relative (%)
3.1
9.3
12.5
Source: Bloomberg
Price target and risks We base our Overweight and price target for Vale PNs on a combination of DCF and an EV/EBITDA multiple of 7.5x, and use a WACC of 9.2% and 3% perpetuity growth. We then add a “voting share” premium of 14% (historical average) to arrive at our fair value for Vale ONs. Risks are a weaker-thanexpected global economy, especially China; harsher-than-expected government regulation; capex delay and/or cost run-ups; and higher operating costs.
O verw eight C om pan y D ata P rice ($) D ate O f P rice 52-w eek R ange ($) M kt C ap ($ m n) Fiscal Year End S hares O /S (m n) P rice Target ($) P rice Target E nd D ate
82
28.29 28 O ct 10 29.67 19.89 151,784.75 D ec 5,365 41.50 31 D ec 11
C om . V ale do R io D oce (C VR D ) (V ALE p;V ALE /P U S) 2009 A E P S - R ecurring FY ($) 1.00 R evenues FY ($ m n) 23,311 E B ITD A F Y ($ m n) 9,629 E V /E B ITD A FY 17.7 P /E (U S D ) FY 28.8
2010E 3.02 41,995 24,188 7.0 9.5
2011E 4.13 54,963 34,785 4.8 7.0
2012E 4.62 61,085 38,832 4.1 6.2
S ource: C om pany data, B loom berg, J.P. M organ estim ates. (1) P/E m ultiples calculated assum ing 100% P N s. P/E m ultiples, considering O N s as w ell, are 10.3x, 7.4x and 6.6x for '10, '11 and '12, respectively. (2) Shares O /S in the 'C om pany D ata' table represents the total num ber of shares outstanding for V ale, i.e. O N s and PN s.
Ben Laidler (1-212) 622-5252
[email protected]
Latin America Equity Research November 2010
Vale PN: Summary of Financials Income Statement
FY09A
FY10E
Revenues COGS ex D&A SG&A Depreciation EBITDA EBITDA margin Financial income Financial expense FX & Monetary gains (losses) Other Nonoperarting income Equity income EBT Taxes Minority interest Extraordinary Net income Net Income Recurring Net income margin (recurring) EPS EPS Recurring
23,311 (11,030) (1,130) (2,722) 9,629 41.3% 381 (1,558) 675 (2,503) 433 6,952 (2,100) (107) 171 5,349 5,178 22.2% 1.00 1.00
Revenue growth EBITDA growth Net income growth FCF growth
(37.7%) 80.2% (52.8%) 151.2% (59.6%) 199.7% (124.3%) (480.9%)
FY11E
FY12E
FY13E
41,995 54,963 61,085 57,600 (14,466) (16,483) (18,332) (19,099) (1,548) (2,026) (2,252) (2,124) (3,033) (3,744) (3,957) (4,136) 24,188 34,785 38,832 34,804 57.6% 63.3% 63.6% 60.4% 282 282 469 766 (2,076) (2,076) (2,646) (3,167) 119 (305) (304) (283) (2,633) (2,717) (2,874) (2,814) 1,169 1,308 1,358 1,088 18,640 27,895 31,189 26,744 (3,485) (6,695) (7,485) (6,419) (141) (332) (296) (286) (151) 0 0 0 16,033 22,176 24,766 21,127 16,184 22,176 24,766 21,127 38.5% 40.3% 40.5% 36.7% 2.99 4.13 4.62 3.94 3.02 4.13 4.62 3.94
Cash Accounts receivable Inventories Other current assets Total Current Assets Net PP&E Other assets Total assets
11,040 19,359 31,110 51,339 63,607 3,120 7,633 9,987 11,090 10,460 3,196 4,589 5,305 5,845 6,093 3,938 3,986 5,215 5,791 5,462 21,294 35,567 51,617 74,065 85,622 68,810 79,416 89,816 99,256 105,611 12,175 22,528 27,231 28,775 26,319 102,279 137,512 168,664 202,097 217,553 2,982 4,071 4,071 4,071 4,071 2,309 3,862 5,054 5,612 5,293 3,890 6,080 7,955 8,834 8,332 9,181 14,014 17,080 18,517 17,696 19,898 26,844 33,589 40,350 45,294 12,703 23,014 24,980 31,493 29,134 41,782 63,871 75,649 90,359 92,124 3,562 4,811 6,890 8,277 9,291 56,935 68,830 86,125 103,461 116,137 102,279 137,512 168,664 202,097 217,553
Short-term debt
Accounts payable Other current liabilities Total Current Liabilities Long-term debt Deferred taxes Other liabilities Total liabilities Minority Interests Shareholders' equity Liabilities + Equity
FY10E
FY11E
FY12E
FY13E
11.1% 11.6% 11.7% 33.5%
(5.7%) (10.4%) (14.7%) 2.7%
Net debt Net Debt/Capital Debt/Capital Net Debt/EBITDA
11,840 14.2% 27.4% 1.2
11,555 11.1% 29.6% 0.5
6,549 5.0% 28.8% 0.2
FY11E
FY12E
FY13E
Valuation, Macro
FY09A
FY10E
FY11E
FY12E
FY13E
EV/EBITDA P/E P/BV EV/tonne FCF yield Dividend yield ROE Net income margin Net revenue/Assets Assets/Equity ROIC Shares ADRs
17.7 28.4 1.8 727 (1.3%) 1.8% 9.4% 22.2% 22.8% 1.8 6.6% 5,365 5,365
7.0 9.4 2.4 643 4.9% 2.0% 23.3% 38.5% 30.5% 2.0 18.8% 5,365 5,365
4.8 6.8 1.9 576 8.6% 3.2% 25.7% 40.3% 32.6% 2.0 20.7% 5,365 5,365
4.1 6.1 1.6 502 11.5% 4.9% 23.9% 40.5% 30.2% 2.0 19.1% 5,365 5,365
4.4 7.2 1.4 439 11.8% 5.6% 18.2% 36.7% 26.5% 1.9 14.7% 5,365 5,365
WACC Perpetual Growth Cost of equity Cost of debt
9.2% 3.0% 11.1% 8.8%
FY09A
Capex Change in working capital Free cash flow Dividends Dividend % of net income Capex/depreciation CAPEX/sales Working capital Working capital/sales
(11,024) 17 (1,958) (2,724) 50.9% 4.0 47.3% 4,055 17.4%
(12,826) (15,384) (14,688) (11,822) (2,210) (1,232) (783) (110) 7,459 13,143 17,545 18,027 (3,000) (4,881) (7,430) (8,451) 18.7% 22.0% 30.0% 40.0% 4.2 4.1 3.7 2.9 30.5% 28.0% 24.0% 20.5% 6,265 7,497 8,280 8,390 14.9% 13.6% 13.6% 14.6%
Shipments Avg price/t Cash COGS/t EBITDA/t
247,261 94 45 39
281,284 308,962 330,012 363,340 149 178 185 159 51 53 56 53 86 113 118 96
Shipments chg Avg price/t chg Cash COGS/t chg EBITDA/t chg
(16.5%) (25.4%) (10.9%) (43.5%)
13.8% 58.4% 15.3% 120.8%
Capex Maintenance
(11,024) (2,158)
(12,826) (15,384) (14,688) (11,822) (2,270) (2,539) (3,051) (3,570)
(8,866)
FY09A
30.9% 43.8% 38.3% 76.2%
Operating Data, Ratios
Expansion
FY10E
Balance Sheet
9.8% 19.2% 3.7% 30.9%
6.8% 4.0% 4.1% 4.5%
(10,557) (12,845) (11,637)
10.1% (14.4%) (5.4%) (18.6%)
(6,918) (14,243) (4.4%) (8.1%) 28.4% 28.2% (0.2) (0.4)
(8,251)
Source: Company reports and JPMorgan estimates. Note: $ in millions (except per-share data). Fiscal year ends Dec
83
Ben Laidler (1-212) 622-5252
[email protected]
Latin America Equity Research November 2010
Usiminas
Underweight
USIM5.SA www.usiminas.com.br
Price Target: R$26
R$20.96 (28 Oct 10)
End Date: Dec 2011
Company description Usiminas is the largest flat-steel producer in Brazil, with ~9.5Mtpy of crude steel capacity. It has two plants – its original plant in Ipatinga and the plant of former Cosipa in the state of São Paulo. The company produces a broad range of steel products and is the main domestic supplier for the automotive and auto parts industries in Brazil. Aside from this, USI also owns iron ore mines and has interests in logistics and capital goods assets.
Brazil Metals & Mining Rodolfo R. De Angele AC (55-11) 3048-3888
[email protected] Banco J.P. Morgan S.A. Bloomberg JPMA ANGELE <GO>
Investment case We expect the outlook for Usiminas to continue to be challenging in the medium term, driven by deteriorating fundamentals for the Brazilian flat-steel industry. Imports into Brazil, in our view, are here to stay as Brazil lacks rolling capacity to supply the flat-steel demand in the domestic market, keeping prices as well as domestic premiums under pressure. In addition, the company should continue to suffer higher raw material costs, which we believe are unlikely to subside meaningfully until 2014. We see potential in USI’s mining unit, but there are challenges related to finding a viable solution for the port.
Price performance (R$) Price Performance 30 R$
26 22 18 Oct-09
Jan-10
Apr-10
Jul-10
Oct-10
Source: Bloomberg.
Potential for earnings downgrades We believe there are downside risks to the consensus expectations for domestic steel prices, as premiums should remain under pressure, driven by continued strong inflow of imports and a strong Real. In addition, we expect raw material prices to remain tight, keeping margins under check. Finally, a potential delay in the recovery of heavy plates should cause further downside to earnings.
Performance 1M
3M
Absolute (%)
-17.8
-9.3
12M -8.3
Relative (%)
-10.8
-29.0
-21.3
Source: Bloomberg.
Prospects for re-/derating Global steel supply discipline (resulting in higher prices) and any weakening in raw material costs should help rerate Usiminas. In addition, a solution to the port issues and/or a potential IPO of the mining unit could rerate the stock. Price target and risks We rate Usiminas UW based on our Dec 11 price target of R$26/share UPDATE, which is derived from a combination of DCF (80%) and multiples (20%). We use a WACC of 10.9%, perpetuity growth of 3% and target EV/EBITDA of 5.0x (historical average). The main upside risks are related to depreciation in BRL, higher international steel prices and potential increases in steel import duties. Usiminas (USIM5.SA;USIM5 BZ) Company Data Price (R$) Date Of Price 52-week Range (R$) Mkt Cap (R$ mn) Fiscal Year End Shares O/S (mn) Price Target (R$) Price Target End Date
84
20.96 28 Oct 10 32.22 19.57 21,215.63 Dec 1,012 26.00 31 Dec 11
EPS - Recurring FY (R$) Revenues FY (R$ mn) EBITDA FY (R$ mn) Bloomberg EBITDA FY (R$ mn) EV/EBITDA FY P/E (USD) FY
2009A 1.10 10,924 1,715 1,537
2010E 1.02 14,183 3,230 3,113
2011E 1.88 16,049 4,413 4,202
2012E 2.45 17,831 5,503 5,103
2013E 2.63 18,103 5,572
16.3 24.6
7.8 23.4
6.1 13.3
5.2 10.7
5.3 10.2
Source: Company data, Bloomberg, J.P. Morgan estimates. 'Bloomberg' above denotes Bloomberg consensus estimates.
Ben Laidler (1-212) 622-5252
[email protected]
Latin America Equity Research November 2010
Usiminas: Summary of Financials Income Statement
FY09A
Revenues COGS ex D&A SG&A Depreciation EBITDA EBITDA margin Financial income Financial expense FX & Monetary gains (losses) Other Nonoperarting income Equity income EBT Taxes Minority interest Extraordinary Net income Net Income Recurring Net income margin (recurring) EPS EPS Recurring
10,924 (8,465) (740) (975) 1,715 15.7% 378 (627) 818 251 40 1,599 (489) 0 128 1,239 1,111 10.2% 1.22 1.10
FY10E
FY11E
FY12E
FY13E
Balance Sheet
FY09A FY10E FY11E FY12E FY13E
Cash Accounts receivable Inventories Other current assets Total Current Assets Net PP&E Other assets Total assets Accounts payable Other current liabilities Total Current Liabilities Long-term debt Deferred taxes Other liabilities Total liabilities Minority Interests Shareholders' equity Liabilities + Equity
3,083 1,793 3,637 815 9,329 11,562 4,857 25,747 917 815 1,506 3,238 6,124 812 10,173 355 15,219 25,747
6,477 2,113 3,996 780 13,366 14,580 5,149 33,094 785 1,068 1,471 3,324 9,280 921 13,525 377 19,193 33,094
5,097 2,247 4,238 882 12,464 17,059 5,595 35,118 739 1,063 1,665 3,466 8,734 1,042 13,241 377 21,500 35,118
5,345 2,496 4,507 980 13,328 18,172 6,022 37,522 781 1,130 1,850 3,761 9,239 1,157 14,157 377 22,988 37,522
6,052 2,534 4,581 995 14,162 19,453 6,087 39,702 832 1,149 1,878 3,859 9,839 1,175 14,873 377 24,453 39,702
3,957 17.8% 31.6% 2.3
3,588 12.3% 34.4% 1.1
4,376 14.1% 30.6% 1.0
4,675 14.2% 30.4% 0.8
4,619 13.2% 30.4% 0.8
14,183 16,049 (10,119) (10,732) (870) (824) (822) (917) 3,230 4,413 22.8% 27.5% 394 618 (999) (1,326) (372) (270) (187) (211) 211 221 1,454 2,528 (419) (628) 0 0 0 0 1,035 1,901 1,035 1,901 7.3% 11.8% 1.02 1.88 1.02 1.88
17,831 18,103 (11,413) (11,601) (826) (839) (1,073) (1,143) 5,503 5,572 30.9% 30.8% 478 499 (1,403) (1,494) (222) (27) (234) (238) 243 234 3,291 3,403 (810) (740) 0 0 0 0 2,481 2,663 2,481 2,663 13.9% 14.7% 2.45 2.63 2.45 2.63
(30.4%) (71.5%) (62.8%) (110.9%)
29.8% 88.3% (16.4%) (522.6%)
13.2% 36.7% 83.6% (62.7%)
11.1% 24.7% 30.5% (345.5%)
1.5% 1.3% 7.3% 36.7%
Net debt Net Debt/Capital Debt/Capital Net Debt/EBITDA
Operating Data, Ratios
FY09A
FY10E
FY11E
FY12E
FY13E
Valuation, Macro
Capex Change in working capital Free cash flow Dividends Dividend % of net income Capex/depreciation CAPEX/sales Working capital Working capital/sales
2,061 811 364 700 56.5% 2.1 18.9% 4,164 38.1%
3,392 (488) (1,540) 461 44.5% 4.1 23.9% 4,651 32.8%
3,396 (309) (574) 665 35.0% 3.7 21.2% 4,960 30.9%
2,186 (400) 1,409 992 40.0% 2.0 12.3% 5,360 30.1%
2,424 (86) 1,926 1,198 45.0% 2.1 13.4% 5,446 30.1%
Shipments Avg price/t Cash COGS/t EBITDA/t
5,631 1,940 1,503 305
7,065 2,007 1,432 457
7,407 2,167 1,449 596
7,805 2,285 1,462 705
8,007 2,261 1,449 696
(21.5%) (11.4%) 22.2% (63.6%)
25.5% 3.5% (4.7%) 50.1%
4.8% 7.9% 1.2% 30.4%
5.4% 5.4% 0.9% 18.3%
2.6% (1.0%) (0.9%) (1.3%)
Capex Maintenance
2,061 476
3,392 439
3,396 466
2,186 506
2,424 531
Expansion
1,585
2,957
2,930
1,680
1,893
Revenue growth EBITDA growth Net income growth FCF growth
Shipments chg Avg price/t chg Cash COGS/t chg EBITDA/t chg
Short-term debt
FY09A FY10E FY11E FY12E FY13E
EV/EBITDA P/E P/BV EV/tonne FCF yield Dividend yield ROE Net income margin Net revenue/Assets Assets/Equity ROIC Shares ADRs
16.3 22.4 1.5 4,928 1.6% 3.3% 8.1% 10.2% 42.4% 1.7 2.4% 1,012 -
WACC Perpetual Growth Cost of equity Cost of debt
10.9% 3.0%
7.8 21.3 1.2 3,838 (6.6%) 2.2% 5.4% 7.3% 42.9% 1.7 5.6% 1,012 -
6.1 12.1 1.1 3,759 (2.5%) 3.1% 8.8% 11.8% 45.7% 1.6 8.1% 1,012 -
5.2 9.8 1.0 3,599 6.0% 4.7% 10.8% 13.9% 47.5% 1.6 9.7% 1,012 -
5.3 9.3 1.0 3,498 8.2% 5.6% 10.9% 14.7% 45.6% 1.6 9.4% 1,012 -
Source: Company reports and JPMorgan estimates. Note: R$ in millions (except per-share data). Fiscal year ends Dec.
85
Ben Laidler (1-212) 622-5252
[email protected]
Latin America Equity Research November 2010
Oil, Gas & Petrochemicals It’s all about creating economic value. The value chain of oil production has many moving parts, but at the end of the day what matters here as in any other business is adding value to the base of capital employed. Production growth, backlog growth and asset growth matter little if the returns on new investments don’t cover the cost of capital, in our view.
Sergio Torres AC (1-212) 622-3378
[email protected] J.P. Morgan Securities LLC Bloomberg JPMA TORRES <GO>
Integrated oils EV/DACF
Bullish oil curve favors all; one must be selective An improved outlook for oil prices has emerged in tandem with global currency issues benefiting the earnings outlook of the sector as a whole. As always, we favor portfolios that can beat the performance of the underlying commodity. Services & equipment are now a large portion of our coverage, and there we focus on exposure to capex trends and superior earnings power relative to peers. Integrated oils: Petrobras and Ecopetrol are both national oil companies (NOCs) with the mandate to supply the domestic fuels market. This imposes significant pressure on their E&P segments to keep replenishing reserves. Historically PBR has done a great job, but we are worried about its ability to add value on the recent asset purchase for $43 billion. In the meantime Ecopetrol is expanding production of low-cost barrels and finding new ways to boost its exploration success. E&P: The appeal of independent E&P names keeps growing; emphasis remains on exploration. The market will operate in 2011 with 2 new players in Brazilian E&P, HRT and Karoon. The heavyweight remains OGX, which was our top pick in 2010. In Colombia, juniors are spreading, with adult names being scarce. Services & equipment: The cycle stage still appears to favor exploration over development, and the key is gaining exposure to capex trends. Tenaris is enhancing positioning with minimal investments but more importantly it stands to benefit from cost reductions. Lupatech is investing in value-neutral ventures in order to gain access to new sources of revenue. Petrochemicals: The change in scope of PBR’s Comperj project changed drastically the outlook for Braskem in the Brazilian market. Recommendations Our top picks for 2011 are Tenaris (TS US), the world’s most profitable OCTG producer, and Pacific Rubiales (PRE CN), the largest and most dynamic independent E&P producer in Colombia.
86
10E
11E
12E
Petrobras
9.5x
9.5x
10.4x
Petrochina
7.7x
7.2x
6.6x
Ecopetrol
18.3x
14.1x
12.5x
Majors
5.8x
5.2x
4.9x
Sinopec
6.1x
5.4x
5.0x
10E
11E
12E
Petrobras
9.8x
12.2x
12.2x
Petrochina
13.2x
12.8x
12.0x
Ecopetrol
25.6x
17.9x
14.9x
Majors
9.6x
8.8x
8.3x
Sinopec
9.4x
8.2x
8.0x
12E
P/E
Source: J.P.Morgan estimates, Bloomberg.
E&P
EV/EBITDA
10E
11E
OGX
n.m
n.m
n.m
Pacific Rubiales
9.1x
4.5x
3.4x
Gran Tierra Energy
5.0x
3.9x
3.1x
Latam Peers
10.2x
9.8x
6.8x
Global Peers
28.2x
7.3x
20.4x JPMe
EV/BOE
2P
2P+2C
OGX
n.m
9.9
5.9
Pacific Rubiales
30.3
13.5
9.6
Gran Tierra Energy
56.7
34.6
7.4
Latam Peers
14.0
6.0
n.m
Global Peers
18.5
11.2
10.7
Source: J.P.Morgan estimates, Bloomberg.
Oil services & equipment EV/EBITDA
10E
11E
12E
Tenaris
11.3x
7.9x
7.0x
Vallourec
6.2x
7.9x
6.6x
TMK
8.1x
6.2x
4.8x
Lupatech
14.4x
9.2x
5.9x
10E
11E
12E
Tenaris
20.0x
15.9x
14.0x
Vallourec
25.3x
12.3x
10.2x
TMK
20.2x
11.0x
7.2x
Lupatech
n.m
16.8x
13.3x
P/E
Source: J.P.Morgan estimates, Bloomberg.
Ben Laidler (1-212) 622-5252
[email protected]
Latin America Equity Research November 2010
Top picks and stock to avoid Top picks Pacific Rubiales Tenaris Avoid Lupatech
Price
Code
Rating
31.69 41.33
PRE CN TS US
21.55
LUPA3 BZ
Mkt cap (US$MM)
OW OW N
604
P/E (x) 10E
11E
EPS 10E
11E
Div. yield 11E (%)
ROE 11E (%)
36.4 11.4
13.2 7.9
0.90 2.11
2.43 2.68
-
15.2 13.3
16.8
13.3
0.11
1.28
-
1.0
Source: Bloomberg, J.P. Morgan estimates. Note: Share prices and valuations are as of October 28, 2010.
Energy absolute and relative to MSCI LatAm
Energy EPS integer 140
2000
Absolute
2011
Relativ e to MSCI EMF Index 130
1800 1600
120
1400 1200
2010
110
1000 800
100
600 400
90 80
200 0
70
Dec-02
Mar-04
May -05
Aug-06
Oct-07
Jan-09
Mar-10
Feb-09
Jul-09
Dec-09
May -10
Source: MSCI, Bloomberg, IBES, Datastream, J.P. Morgan.
Source: MSCI, Bloomberg, IBES, Datastream, J.P. Morgan.
Energy 12 mth fwd PE
Energy trailing PB
18
4.5
15
3.5
12
2.5
Oct-10
4 3 2
9
1.5 1
6
0.5 0
3 95
97
98
99
00 PE
01
02
03
04
Av g
Source: MSCI, Bloomberg, IBES, Datastream, J.P. Morgan.
05
06
+1SD
07
08
10
-1SD
95
97
98
99
00 PB
01
02
03
04
Av g
05
06
+1SD
07
08
10
-1SD
Source: MSCI, Bloomberg, IBES, Datastream, J.P. Morgan.
87
Ben Laidler (1-212) 622-5252
[email protected]
Latin America Equity Research November 2010
Pacific Rubiales Energy
Overweight
PRET.TO www.pacificrubiales.com
Price Target: C$36
C$31.69 (28 Oct 10)
End Date: Dec 2011
Pacific Rubiales is the largest independent E&P company in Colombia and the second-largest operator after NOC Ecopetrol. PRE has been a successful growth and value play since 2009. In our view, PRE’s low risk development story is already priced in, but we believe that the risk/reward is still attractive. PRE is our favorite stock to play the potential of heavy oil in Colombia. Low-risk exploration in attractive prospects should drive value in 2011. PRE has 2P reserves of 269 mn boe but has identified ~628 mn bbl of prospective oil resources in Colombia and Peru. PRE’s track record in exploration is over 80% success in Colombia, and it has recently acquired exploration licenses in onshore Guatemala that are believed to be exposed to a continuation of the onshore basins in Mexico. Our price target is not fully loaded. We are conservative in our NAV assumptions because we are only assuming half of the prospective resource estimated by PRE. Our estimates have upside from further drilling success that could confirm the company’s prospective figures, from the gas export project that could start in 2013 and from further analysis of the prospects in Guatemala and block CPO-12 in Colombia. The company still trading at compelling multiples. PRE is trading at 3.7x EV/EBITDA for 2011e. Our Dec’11 target price of C$36/share implies an EV/EBITDA exit multiple of 3.9x 2012e. With the company having doubled production in 2010 to 67 kboed (net after royalties), we expect production to grow 67% in 2011 and 22% in 2012, excluding exploration potential.
Colombia Exploration & Production Sergio Torres AC (1-212) 622-3378
[email protected] J.P. Morgan Securities LLC Bloomberg JPMA TORRES <GO>
Price Performance 30 C$
20 10 Nov-09
Feb-10
May-10
Aug-10
Nov-10
Source: Bloomberg, J.P.Morgan.
Performance Absolute (%)
1M
3M
12M
15
29
29
Source: Bloomberg, J.P. Morgan.
Main risks: 1) unsuccessful exploratory drilling; 2) uncertainty over capital expenditures; 3) disappointing results at Rubiales field tests for secondary recovery; and 4) a decline in oil prices.
Company Data Price (C$) Date Of Price 52-week Range (C$) Mkt Cap (C$ mn) Fiscal Year End Shares O/S (mn) Price Target (C$) Price Target End Date
88
31.69 28 Oct 10 33.58 12.86 8,356.65 Dec 264 36.00 31 Dec 11
Pacific Rubiales Energy Corp (PRE.TO;PRE CN) 2009A EPS FY ($) (0.54) Bloomberg EPS FY ($) (0.40) P/E FY NM EBITDA FY ($ mn) 222 EV/EBITDA FY 33.8 ROE FY (10.2%) ROCE FY (10.2%)
2010E 0.90 1.05 35.1 898 7.6 18.2% 18.5%
2011E 2.43 2.49 13.0 1,705 3.7 34.1% 44.9%
Source: Company data, Bloomberg, J.P. Morgan estimates. 'Bloomberg' above denotes Bloomberg consensus estimates.
2012E 2.39 2.96 13.2 1,976 2.7 24.1% 45.4%
Ben Laidler (1-212) 622-5252
[email protected]
Latin America Equity Research November 2010
Pacific Rubiales: Summary of Financials Income Statement - Annual Revenues Cost of products sold Gross profit SG&A DD&A Other operating expenses Operating Income EBIT EBITDA
FY09A
FY10E FY11E FY12E
639 (488) 151 (125) (196) (292) 26 26
1,633 3,132 3,452 (993) (1,931) (2,229) 640 1,200 1,223 (115) (160) (178) (396) (701) (797) (597) (1,231) (1,431) 525 1,040 1,045 525 1,040 1,045
Income Statement - Quarterly Revenues Cost of products sold Gross profit SG&A DD&A Other operating expenses Operating Income EBIT
1Q10A
2Q10A
3Q10E
4Q10E
381 (196) 184 (62) (65) (131) 122 122
-
-
-
222
898
1,705
1,976
EBITDA
187
-
-
-
Net interest income / (expense) Income applicable to minority interests Pretax income Taxes Tax rate (%) Reported net income Non-recurring items, disc ops Adjusted net income Average diluted shares outstanding
(48) 2 (109) (46) (154) (154) 283
(84) 0 430 (142) 288 288 283
(61) 0 999 (300) 699 699 283
(53) 0 1,011 (303) 708 708 283
Net interest income / (expense) Income applicable to minority interests Pretax income Taxes Tax rate (%) Reported net income Non-recurring items, disc ops Adjusted net income Average diluted shares outstanding
(14) 0 81 (49) 32 32 292
-
-
-
EPS EPS growth rate (%) Dividend per share
(0.54) 0.90 2.43 - (287.7%) 142.6% 0.00 0.00 0.00
2.39 1.2% 0.00
EPS EPS growth rate (%) Dividend per share
0.11 0.00
-
-
-
WTI crude price ($/bbl) Henry Hub natural gas price ($/mcf)
61.66 3.44
83.00 3.58
WTI crude price ($/bbl) Henry Hub natural gas price ($/mcf)
78.76 3.51
-
-
-
FY09A
FY10E
FY11E
FY12E
(59.9) 24.0 33.8 54.2
31.9 44.3 7.6 7.7
13.2 9.3 3.7 4.6
13.0 7.3 2.7 3.2
14.8% 29.3% 4.6 (10.2%) (10.2%)
3.2% 27.1% 10.4 18.2% 18.5%
(29.3%) 21.1% 24.8 34.1% 44.9%
(50.0%) 15.9% 25.7 24.1% 45.4%
Balance Sheet and Cash Flow Data
FY09A
79.50 3.50
86.00 3.65
FY10E FY11E FY12E
Cash and cash equivalents Other current assets Total current assets Net PP&E Other assets Total assets
399 21 594 1,991 177 2,763
568 21 763 1,991 177 2,932
1,363 21 1,558 1,991 177 3,727
2,377 21 2,572 1,991 177 4,740
Total debt Total liabilities Minority interests Preferred stock Shareholders' equity
621 1,262 1,501
621 1,262 1,670
651 1,292 2,436
651 1,292 3,449
Net Income DD&A Deferred taxes Other Cash earnings Change in working capital Cash flow from operations Capex Dividends Share buybacks (net) Change in debt Change in preferred stock Other uses of cash Change in cash
(154) (196) 26 (87) 111 (393) 0 426 308
288 (396) 525 0 695 (853) 0 0 167
699 (701) 1,040 0 1,380 (613) 0 30 797
708 (797) 1,045 0 1,486 (473) 0 0 1,013
549
325
30
0
Free cash flow
Ratio Analysis Valuation P/E (adjusted) P/CF Enterprise value/EBITDA EV/DACF Ratios Net debt/equity Net debt/capital Net coverage ratio ROE ROCE Yield and cash returns CFPS CF yield FCF yield Dividend yield Dividend payout ratio Buyback yield Total cash returns (%)
Mkt Cap (current) ($bn) Enterprise Value (current)
1.31 0.71 3.39 4.30 (241.1%) 69.5% 136.8% 171.8% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 573.0% 31,588.8% 67,971.8% 69,153.6%
8.59 5,724
Source: Company reports and J.P. Morgan estimates. Note: $ in millions (except per-share data). Fiscal year ends Dec
89
Ben Laidler (1-212) 622-5252
[email protected]
Latin America Equity Research November 2010
Tenaris
Overweight
TS www.ir.tenaris.com
Price Target: $52
$41.33 (28 Oct 10)
End Date: Dec 2011
TS is one of the best early-cycle plays. We believe oil prices will lead a reactivation of exploration and development drilling globally. Tenaris is the most profitable manufacturers of steel tubular goods for the oil and gas industry. The company has a leading footprint in the niche of premium (oil country tubular goods (OCTG). We believe that Tenaris (TS) is likely to keep its dominance position on global OCTG market and gain market share in other key growing markets such as the US, Saudi Arabia, Iraq and, yes, Brazil. We project an annualized earnings expansion of 12.9% between 2009 and 2012, mostly driven by cost reduction and volume growth. Reduction in structural costs is a major differentiating factor because the industry is suffering from sluggish pricing and cost pressures. Equipment producers with global footprints, such as TS, offer investors a broadly diversified play on oil, gas, onshore and offshore projects, with ROCEs that are bouncing from the cycle trough.
Global Oil Services & Equipment Sergio Torres AC (1-212) 622-3378
[email protected] J.P. Morgan Securities LLC Bloomberg JPMA TORRES <GO>
Price Performance 48 44 $ 40 36 32 Nov-09
Benefits from expansion to be visible as early as 2011. TS is adding capacity in its Mexico plant in late 2010. Ramp-up of capacity would allow TS to export low-diameter OCTG out of Mexico to the US shale gas market, among other destinations. New facilities could also allow TS to reallocate output from higher-cost sites, such as Europe. We don’t see risk of overcapacity in seamless OCTG. For now we believe the NA market appears in check. With the countervailing duties on China there is a shortfall of about 1.5 mn tons of seamless pipe in the US alone. Planned expansions are targeting such shortfall.
Feb-10
May-10
Aug-10
Nov-10
Source: Bloomberg, J.P.Morgan.
Performance Absolute (%)
1M
3M
12M
7.8
3.3
12.3
Source: Bloomberg, J.P. Morgan.
We have a YE11 target of $52/ADR, derived from a combination of SOTP model and target multiples. On an EV/EBITDA basis, TS is trading at 7.9x, similar to peer Vallourec. We believe TS deserves a premium because it generates ~22% higher EBITDA per ton than VK (rated OW by JPM European machinery analyst Alessandro Abate). Tenaris SA (TS;TS US) Company Data Price ($) Date Of Price 52-week Range ($) Mkt Cap ($ mn) Fiscal Year End Shares O/S (mn) Price Target ($) Price Target End Date
90
41.33 28 Oct 10 47.79 32.91 24,395.80 Dec 590 52.00 31 Dec 11
EPS FY ($) Bloomberg EPS FY ($) Revenues FY ($ mn) EBITDA FY ($ mn) EV/EBITDA FY P/E FY
2009A 2.05 2.02 8,183 2,114 9.5 20.2
2010E 2.06 2.00 7,869 2,192 9.6 20.0
2011E 2.59 2.97 9,434 2,940 6.9 15.9
Source: Company data, Bloomberg, J.P. Morgan estimates. 'Bloomberg' above denotes Bloomberg consensus estimates.
2012E 2.95 3.58 10,474 3,282 6.0 14.0
Ben Laidler (1-212) 622-5252
[email protected]
Latin America Equity Research November 2010
Tenaris SA: Summary of Financials Income Statement - Annual Revenues Cost of products sold Gross profit SG&A DD&A Other operating expenses Operating Income EBIT
FY09A FY10E FY11E FY12E
Income Statement - Quarterly
8,183 (4,598) 3,318 (1,235) (266) (4,865) 1,847 1,847
7,869 (4,133) 3,330 (1,547) (405) (4,539) 1,787 1,787
9,434 (4,671) 4,218 (1,824) (546) (5,217) 2,394 2,394
10,474 (5,202) 4,692 (1,990) (579) (5,781) 2,702 2,702
EBITDA
2,114
2,192
2,940
3,282
EBITDA
Net interest income / (expense) Income applicable to minority interests Pretax income Taxes Tax rate (%) Reported net income Non-recurring items, disc ops Adjusted net income Average diluted shares outstanding
(89) (46) 1,785 (511) 1,208 -
(59) (36) 1,771 (517) 1,219 -
(57) (40) 2,337 (767) 1,530 -
(30) (50) 2,672 (882) 1,740 -
Net interest income / (expense) Income applicable to minority interests Pretax income Taxes Tax rate (%) Reported net income Non-recurring items, disc ops Adjusted net income Average diluted shares outstanding
2.05 (43.2%) 0.86
2.06 0.9% 0.38
2.59 25.5% 0.38
2.95 13.8% 0.52
EPS EPS growth rate (%) Dividend per share
61.66 -
79.94 -
86.00 -
83.00 -
WTI crude price ($/bbl) Henry Hub natural gas price ($/mcf)
EPS EPS growth rate (%) Dividend per share WTI crude price ($/bbl) Henry Hub natural gas price ($/mcf)
Balance Sheet and Cash Flow Data Cash and cash equivalents Other current assets Total current assets Net PP&E Other assets Total assets
FY09A FY10E FY11E FY12E 2,123 502 5,622 3,255 502 13,483
980 481 5,623 3,711 481 13,796
1,691 481 7,066 3,868 481 15,182
2,468 481 7,446 3,522 481 15,440
1,447 4,391 629 9,092
1,213 4,111 619 9,685
1,213 4,217 619 10,965
1,292 4,263 619 11,177
Net Income DD&A Deferred taxes Other Cash earnings Change in working capital Cash flow from operations Capex Dividends Share buybacks (net) Change in debt Change in preferred stock Other uses of cash Change in cash
1,208 (266) 861 1,132 1,737 3,064 461 508 (1,465) 4
1,219 (405) 0 1,122 (1,077) 372 881 226 (239) (1,032)
1,530 (546) 0 1,526 (625) 1,491 490 224 0 776
1,740 (579) 0 1,740 362 2,732 511 305 79 1,996
Free cash flow
(1,176)
1,962
2,308
1,526
Total debt Total liabilities Minority interests Preferred stock Shareholders' equity
Revenues Cost of products sold Gross profit SG&A DD&A Other operating expenses Operating Income EBIT
Ratio Analysis Valuation P/E (adjusted) P/CF Enterprise value/EBITDA EV/DACF
1Q10A 2Q10A 3Q10E 4Q10E 1,639 (916) 652 (292) (71) (987) 309 309
1,982 (1,112) 798 (337) (71) (1,183) 405 405
1,900 (942) 828 (415) (130) (1,072) 413 413
2,349 (1,163) 1,052 (503) (133) (1,296) 550 550
380
531
543
683
(13) (3) 328 (105) 220 -
(18) (13) 400 (105) 282 -
(14) (10) 399 (131) 258 -
(15) (10) 535 (176) 350 -
0.37 (1.3%) 0.00
0.48 28.5% 0.42
0.44 (8.4%) 0.00
0.59 35.3% 0.19
78.76 -
76.00 -
80.00 -
85.00 -
FY09A FY10E FY11E FY12E
20.2 21.6 9.5 -
20.0 21.7 9.6 -
15.9 16.0 6.9 -
14.0 14.0 6.0 -
Ratios Net debt/equity Net debt/capital Net coverage ratio ROE ROCE
13.7% 17.6 14.0% 21.6%
11.1% 26.3 13.0% 19.1%
10.0% 36.5 14.8% 24.2%
10.4% 41.4 15.7% 26.8%
Yield and cash returns CFPS CF yield FCF yield Dividend yield Dividend payout ratio Buyback yield Total cash returns (%)
1.92 2.0% 28.5% -
1.90 0.9% 20.0% -
2.58 0.9% 20.0% -
2.95 1.2% 20.0% -
Mkt Cap (current) ($bn) Enterprise Value (current)
25.15
Source: Company reports and J.P. Morgan estimates. Note: $ in millions (except per-share data). Fiscal year ends Dec
91
Latin America Equity Research November 2010
Retail & Healthcare
Andrea Teixeira AC
Key country dynamics Solid growth in both the retail and healthcare sectors in Brazil has been led by strong consumer demand driven by: (1) Income mobility to middle-income segment. (2) Strong job creation, which is driving unemployment rates to record lows. (3) Inflation under control. These factors are leading to record-high consumer confidence.
J.P. Morgan Securities LLC
(1-212) 622-6735
[email protected]
Bloomberg JPMA TEIXEIRA <GO>
Middle-income expansion is a positive driver for retailers and healthcare companies in Bz 100% 28,6%
80% 60%
As a result we believe the country is the best positioned in terms of growth within Latin America for retailers and healthcare names, while we are still cautious with retail in Mexico. While there is some evidence of economic recovery, correlation with the US economy is still high.
0%
14,2%
15,7%
44,2%
42,5%
42,3%
46,7%
48,6%
48,9%
51,9%
13,0%
11,6%
11,6%
12,6%
13,3%
14,4%
15,5%
2002
2003
2004
2006
2007
2008
2005 A&B
C
D
E
Source: FGV.
Recent consumer deleverage in BZ supports Bz Retailers 25% 20%
16.5%
15% 10% 5%
Brazil
Source: BACEN, J.P. Morgan estimates.
Wage mass growing steadily in Brazil 20% 15% 10% 5% 0% -5% -10% -15% -20%
Source: IBGE.
Unemployment rates at lowest levels 11.0% 10.0% 9.0% 8.0% 7.0%
Unemploy ment Rate
May-10
Jan-10
Sep-09
May-09
Jan-09
Sep-08
May-08
Jan-08
May-07
Jan-07
6.0%
Source: IBGE.
92
13,3%
15,5%
Sep-06
Recommendations OW: Hypermarcas (HYPE3) is a core holding in Brazil consumer, given its focus on high-growth lowerincome segments such as pharma and HPC. Its accelerated M&A allows for more synergies in 20112013e. It trades at a relatively cheap P/E 11e of 20.7x, a 25% discount to Brazilian peers that we view as unwarranted given high EPS CAGR 10-13e of 20%. OW: DASA (DASA3): We expect revenue growth to pick up in 2011 as the company has resumed M&A. DASA will likely start capturing revenue synergies as a result of its integration with MD1. UW: SORIANA (SORIANAB): Lack of catalysts in the short/mid term and rich valuation, trading at 12-M forward P/E of 18.5x, a 20% premium to historical, and 12-M fwd EV/EBITDA of 9.7x, 23% above historical, which in our view does not reflect the risks.
15,3%
14,2%
May-06
Nevertheless, we don’t expect further reratings for the sectors given recent outperformance. Any potential appreciation is likelier to come from earnings surprises.
18,4%
15,0%
Jan-05 Mar-05 May-05 Jul-05 Sep-05 Nov-05 Jan-06 Mar-06 May-06 Jul-06 Sep-06 Nov-06 Jan-07 Mar-07 May-07 Jul-07 Sep-07 Nov-07 Jan-08 Mar-08 May-08 Jul-08 Sep-08 Nov-08 Jan-09 Mar-09 May-09 Jul-09 Sep-09 Nov-09 Jan-10 Mar-10 May-10 Jul-10
For the healthcare sector, the main drivers are: (1) wage mass increase; (2) formal job creation; and (3) increased penetration of private healthcare spending within the population, which is currently very low.
21,7%
Jan-03 Apr-03 Jul-03 Oct-03 Jan-04 Apr-04 Jul-04 Oct-04 Jan-05 Apr-05 Jul-05 Oct-05 Jan-06 Apr-06 Jul-06 Oct-06 Jan-07 Apr-07 Jul-07 Oct-07 Jan-08 Apr-08 Jul-08 Oct-08 Jan-09 Apr-09 Jul-09 Oct-09 Jan-10 Apr-10 Jul-10
Drivers of returns – Multiples and growth Main drivers of growth for the retail sector are (1) consumer confidence, (2) unemployment rate and wage mass increase, (3) inflation, and (4) credit supply.
24,8%
25,4%
30,4%
20%
Jan-06
Growth characteristics and how they are changing In Brazil, both sectors are growing fast, on the back of the solid growth of the Brazilian economy. We expect solid growth to continue but to slightly decelerate in 2011 given tougher comparisons.
40%
30,4%
Sep-07
Ben Laidler (1-212) 622-5252
[email protected]
Ben Laidler (1-212) 622-5252
[email protected]
Latin America Equity Research November 2010
Top picks and stocks to avoid Price Top picks Hypermarcas DASA
Code
R27.99 R$21.07
Stocks to avoid Soriana
Ps37.40
Mkt cap (MM)
Rating
HYPE3 BZ DASA3 BZ
P/E (x) 10E
11E
EPS 10E
11E
Div. yield 11E (%)
ROE 11E (%)
OW OW
R$14,941 R$6,555
28.3 30.9
20.7 17.8
0.99 0.68
1.35 1.18
300.7
31.9
SORIANAB MM UW
Ps67,320
21.6
18.2
1.73
2.06
0.4
10.2
Source: Bloomberg, J.P. Morgan estimates. Note: DASA3 and SORIANAB share prices and valuations are as of November 9, 2010; HYPE3 valuations share prices and valuations are as of October 28, 2010.
Retail absolute and relative to MSCI LatAm
Retail EPS integer 170
1400
Absolute
2011
Relativ e to MSCI EMF Index
1200
150
1000
130
800
2010
110
600 90
400 200
70
0
50
Dec-02
Mar-04
May -05
Aug-06
Oct-07
Jan-09
Mar-10
Feb-09
Jul-09
Dec-09
May -10
Source: MSCI, Bloomberg, IBES, Datastream, J.P. Morgan.
Source: MSCI, Bloomberg, IBES, Datastream, J.P. Morgan.
Retail 12 mth fwd PE
Retail trailing PB
40
Oct-10
14
35
12
30
10
25
8
20
6
15
4
10
2
5
0
95
97
98
99
00 PE
01
02
03
04
Av g
Source: MSCI, Bloomberg, IBES, Datastream, J.P. Morgan.
05
06
+1SD
07
08
10
-1SD
95
97
98
99
00 PB
01
02
03
04
Av g
05
06
+1SD
07
08
10
-1SD
Source: MSCI, Bloomberg, IBES, Datastream, J.P. Morgan.
93
Ben Laidler (1-212) 622-5252
[email protected]
Latin America Equity Research November 2010
Diagnosticos da America (DASA)
Overweight
DASA3.SA www.dasa.com.br
Price Target: $26
R$21.07 (9 Nov 10)
End Date: Dec 2011
Company description Dasa is the largest diagnostic laboratory in Brazil. Its business model is divided into three segments: (1) private clinical and image analysis, (2) public services provider and (3) lab-to-lab operations. Its growth is based on a mix of organic growth and acquisitions. Currently, Dasa is established in 12 states and holds 21 different brands (after acquisition of MD1 and Cerpe). Investment case Our positive view on the company is due to its leading position in the most important markets in Brazil (SP and RJ after the acquisition of MD1) and its exposure to less affluent demographic sectors. Potential for earnings upgrades Dasa announced in the beginning of October the acquisition of MD1, the fourth-largest laboratory in Brazil. The integration process has the potential to create both revenue and cost synergies. DASA should also still benefit from margin expansion as new management is focused on increasing profitability. Prospects for re-/derating Although the stock has been performing strongly lately (more than +40% YTD), we think there is more upside to come. After its weak period of top-line expansion, we expect revenue growth to pick up in 2011 since the company will likely capture revenue synergies as a result of operating leverage from growth and the integration of recent acquisitions MD1 and Cerpe. Dasa trades at a 15% premium to Fleury on a P/E 11e basis, which we believe is warranted given (1) its position in less affluent segments, (2) higher diversification of payers and (3) higher stock liquidity.
Brazil Retail & Healthcare Andrea Teixeira, CFA AC (1-212) 622-6735
[email protected] J.P. Morgan Securities LLC Bloomberg JPMA TEIXEIRA <GO>
Price Performance 20 R$
16 12 Nov-09
Feb-10
May-10
Aug-10
Nov-10
Source: Bloomberg.
Performance Absolute (%)
1M
3M
12M
3.0
27.5
73.1
Source: Bloomberg.
Priced as of the close on November 9, 2010; see our note out November 10 for further details.
Price target and risks Our R$26 price target (end date Dec-11) is based on a 9-year discounted free cash flow to firm (no acquisitions) at a 10.3% nominal reais discount rate and 5.0% perpetuity growth. Main risks to our thesis are (1) if management does not deliver its guidance of 27.5% EBITDA margin, (2) pricing pressure and/or increased competition for acquisitions, and (3) economic slowdown.
Company Data Price (R$) Date Of Price 52-week Range (R$) Mkt Cap (R$ mn) Fiscal Year End Shares O/S (mn) Price Target (R$) Price Target End Date
94
21.10 09 Nov 10 22.00 12.14 6,565.03 Dec 311 26.00 31 Dec 11
Diagnosticos da America (DASA) (DASA3.SA;DASA3 BZ) 2009A 2010E EPS Reported FY (R$) 0.66 0.68 EV/EBITDA FY 21.9 17.3 P/E FY 31.7 30.9 EBITDA FY (R$ mn) 319 401
2011E 1.18 11.7 17.9 580
2012E 1.33 15.8 655
Source: Company data, Bloomberg, J.P. Morgan estimates. Adj. EPS=EPS (reported)+Goodwill Tax Shield.
Ben Laidler (1-212) 622-5252
[email protected]
Latin America Equity Research November 2010
Diagnosticos da America (DASA): Summary of Financials Income Statement
FY09A
FY10E
FY11E
Revenues Cost of Services SG&A Operating Profit (EBIT) EBIT Margin Depreciation EBITDA EBITDA margin Financial income Financial expense FX & Monetary gains (losses) Other Nonoperarting income Equity income EBT Taxes Minority interest Extraordinary Net income Net income margin Technical Reserve Provisions Goodwill Amortisation Adjusted Net Incoome EPS
1,388 (943) (256) 189 13.6% 105 319 23.0% 12 (41) 4 152 2 (1) 0 153 6.0% 84 0.66
1,505 (947) (260) 298 19.8% 103 401 26.6% 98 (164) 8 240 (83) 0 0 157 10.4% 157 0.68
2,158 2,385 2,626 (1,346) (1,488) (1,627) (371) (399) (428) 441 497 572 20.4% 20.9% 21.8% 139 158 161 580 655 732 26.9% 27.5% 27.9% 28 47 90 (96) (102) (102) 11 12 13 384 454 572 (131) (154) (194) 0 0 0 0 0 0 367 415 492 11.7% 12.6% 14.4% 253 300 377 1.18 1.33 1.58
22.0% 14.0% (418.8%) 19.2%
8.4% 25.6% 87.1% (74.9%)
43.4% 44.6% 61.6% (348.9%)
10.5% 13.1% 18.3% 72.3%
Operating Data, Ratios
FY09A
FY10E
FY11E
Capex Change in working capital Free cash flow Dividends Dividend % of net income Capex/depreciation CAPEX/sales Working capital Working capital/sales
93 4 (273) 0 0.0% 0.9 6.7% 272 19.6%
96 73 (69) 9 5.6% 0.9 6.4% 296 19.7%
321 58
Revenue growth EBITDA growth Net income growth FCF growth
Adjusted MLR HC Members ('000) Dental Plan Members ('000) Total Membership ('000) % of Individual Plans/Total Market Share Average Ticket (R$/month) # of PSCs Revenue/Requisition Capex Maintenance
Expansion
FY12E
FY13E
Balance Sheet
Cash Accounts receivable Inventories
FY09A FY10E
FY11E
FY12E
FY13E
287 269 47
268 283 47
396 393 67
780 475 72
1,044 522 79
Other current assets Net PP&E Other assets Total assets Technical Reserves Short-term debt Accounts payable Other current liabilities Long-term debt Deferred taxes Other liabilities Total liabilities Minority Interests Shareholders' equity Liabilities + Equity
110 425 159 1,619 152 50 156 545 8 168 1,080 0 539 1,619
106 575 163 1,794 113 67 224 494 18 179 1,095 0 699 1,793
152 586 233 2,177 113 94 315 494 16 256 1,288 0 889 2,177
170 591 91 2,529 113 102 343 494 76 287 1,415 0 1,113 2,529
187 606 101 2,890 113 111 374 494 84 317 1,493 0 1,397 2,890
10.1% 11.7% 25.9% 25.4%
Net debt Net Debt/Capital Debt/Capital Net Debt/EBITDA
410 33.2% 56.4% 1.3
339 25.9% 46.5% 0.8
211 14.1% 40.6% 0.4
(173) (10.0%) 35.3% (0.3)
(437) (21.8%) 30.3% (0.6)
FY12E
FY13E
Valuation, Macro
FY09A FY10E
FY11E
FY12E
FY13E
150 (56) 171 63 25.0% 1.1 7.0% 402 18.6%
162 (70) 294 75 25.0% 1.0 6.8% 444 18.6%
162 (70) 369 94 25.0% 1.0 6.2% 490 18.6%
337 58
466 68
475 68
482 69
EV/EBITDA P/E P/BV P/S FCF yield Dividend yield ROE Net income margin Net revenue/Assets Assets/Equity ROIC Shares ADRs
21.9 31.7 12.2 4.7 1.7% 0.0% 16.5% 6.0% 85.8% 3.0 15.7% 230 -
17.3 11.7 30.9 17.8 9.4 7.4 4.4 3.1 1.8% 3.0% 41.6% 300.7% 25.3% 31.9% 10.4% 11.7% 83.9% 99.1% 2.6 2.5 230 311 -
15.8 5.9 2.8 355.8% 30.0% 12.6% 94.3% 2.3 311 -
13.3 4.7 2.5 447.9% 30.1% 14.4% 90.9% 2.1 311 -
DCF WACC Perpetual Growth Cost of equity Cost of debt
10.3% 5.0% 10.4% 15.0%
93 -
96 -
150 -
162 -
162 -
-
-
-
-
-
Source: Company reports and J.P. Morgan estimates. Note: R$ in millions (except per-share data). Fiscal year ends Dec
95
Ben Laidler (1-212) 622-5252
[email protected]
Latin America Equity Research November 2010
Hypermarcas
Overweight
HYPE3.SA www.hypermarcas.com.br
Price Target: $30
R$27.99 (28 Oct 10)
End Date: Dec 2011
Company description Hypermarcas, one of the leading consumer products company in Brazil, is established in 3 segments: pharmaceutical, household/personal care and food.
Brazil Retail & Healthcare Andrea Teixeira, CFA AC (1-212) 622-6735
[email protected] J.P. Morgan Securities LLC
Investment case Hypermarcas is a combination of fast-growing consumer exposure in Brazil with a defensive profile as its portfolio is mostly composed of staple goods. Still, the HPC and pharma industries are very fragmented, meaning that there is enough room for additional M&A. Still, even if acquisitions stop, we estimate an improvement in EBITDA margin of at least 200bps.
Bloomberg JPMA TEIXEIRA <GO>
Price Performance
Potential for earnings upgrades The company is targeting 15% same brand sales (SBS) growth for the next few years, which we view as conservative. We believe that the market might incorporate higher estimates as the company delivers stronger results. Also, Hypermarcas has the potential to unlock value by delivering more than official guidance of R$2.5bn in acquisitions for 2010-2011 (it has already delivered R$1.3bn). Recent debenture issue of R$1bn may indicate a continued interest in shopping.
28 R$
24 20 Mar-10
Jun-10
Sep-10
Dec-10
Source: Bloomberg.
Performance
Prospects for re-/derating Our Dec 11 price target is R$30, derived from a 50/50 mix of organic model (R$29 per share) and acquisitions-plus-growth DCF (R$32/share) and considering company official M&A guidance. Also, we ran a sensitivity analysis incorporating an additional R$1bn in M&A, which added R$1 to our PT. Hypermarcas currently trades at P/E 11e of 21x, a 16% discount to Brazil peers, which we view as unwarranted given high EPS CAGR 10-13e of 20%.
Absolute (%)
1M
3M
12M
-2.8
21.6
27.8
Source: Bloomberg.
Price target and risks Our price target is based on a 9-year DCF analysis at 11.3% WACC and perpetuity growth of 6%. We blend the organic and the organic-plusacquisitions scenarios 50/50 in our price target valuation. Main risks to our thesis are (1) increasing competition for acquisitions, (2) potential overhang from private equity fund which owns 17.3% of the company and (3) Hypermarcas is reliant on founder “Junior” to prospect for and negotiate deals.
Company Data Price (R$) Date Of Price 52-week Range (R$) Mkt Cap (R$ mn) Fiscal Year End Shares O/S (mn) Price Target (R$) Price Target End Date
96
27.99 28 Oct 10 30.25 15.95 14,936.24 Dec 534 30.00 31 Dec 11
Hypermarcas S.A. (HYPE3.SA;HYPE3 BZ) 2009A Adj. EPS FY (R$) 1.21 P/E FY 23.1
2010E 0.99 28.2
2011E 1.35 20.7
2012E 1.55 18.1
2013E 1.73 16.2
Source: Company data, Bloomberg, J.P. Morgan estimates. *Adj. EPS = EPS (reported) + Goodwill Tax Shield.
Ben Laidler (1-212) 622-5252
[email protected]
Latin America Equity Research November 2010
Hypermarcas: Summary of Financials Income Statement - Annual
FY09A
FY10E
FY11E
Income Statement - Quarterly
1Q10A
2Q10A
3Q10E
4Q10E
Revenues COGS Gross profit
2,025 (843) 1,182
3,262 (1,416) 1,847
4,111 (1,781) 2,330
Revenues COGS Gross profit
657 (274) 383
758 (327) 431
855 (359) 496
993 (455) 538
SG&A Operating income
(718) 464
(1,138) 708
(1,415) 915
SG&A Operating income
(222) 161
(299) 132
(285) 211
(333) 205
503
784
1,044
EBITDA
175
150
234
226
15
(166)
(157)
0
0
0
Interest, net Other Income Pretax income
(60)
(44)
(57)
(5)
0
0
0
479
542
758
0
101
88
153
200
(166) (34.6%)
(194) (35.7%)
(258) (34.0%)
(39) (38.4%)
(35) (39.5%)
(52) (34.0%)
(68) (34.0%)
Net income - reported (GAAP)
517
529
758
Net income - reported (GAAP)
93
91
153
191
Diluted shares outstanding
421
534
548
Diluted shares outstanding
481
541
548
548
EPS- Reported Adj. EPS
0.74 1.21
0.65 0.99
0.91 1.35
EPS- Reported Adj. EPS
0.13 0.19
0.10 0.17
0.18 0.28
0.24 0.35
FY09A
FY10E
FY11E
Ratio Analysis
FY09A
FY10E
FY11E
499 725 1,836
1,753 1,000 3,612
1,550 1,161 3,677
Sales growth Same store sales growth EBITDA growth EBIT growth
51.9% 60.8% 67.0%
61.1% 56.0% 52.6%
26.0% 33.1% 29.1%
296
868
846 EPS growth - operating
753.3%
(18.3%)
36.6%
Total assets
6,278
9,466
9,504
Short-term Debt Current liabilities
889 1,292
900 1,487
649 1,334
58.4% 22.9% 24.8%
56.6% 21.7% 24.0%
56.7% 22.2% 25.4%
Long-term Debt Total liabilities
1,322 6,278
2,214 9,466
1,796 9,504
Shareholders' equity
3,437
5,341
5,655
4.4
4.0
2.3
39
76
130
(319) 207
(338) 173
(171) 514
Enterprise value / Revenues Enterprise value / EBITDA
29.1
18.2
13.2
(1,961) (1,342) (3.19)
(1,488) (962) (1.80)
(103) 1,182 2.16
P/E
23.1
28.3
20.7
0.00
0.00
185.40
EBITDA Interest, net Other Income Pretax income Income taxes Tax rate
Balance Sheet and Cash Flow Data
Cash and cash equivalents Accounts receivable Current assets PP&E
D&A Change in working capital Cash flow from operations Capex Free cash flow Free cash flow / share Dividends
Income taxes Tax rate
Gross margin EBIT margin EBITDA margin
Debt / EBITDA
Source: Company reports and J.P. Morgan estimates. *Adj. EPS = EPS (reported) + Goodwill Tax Shield. Note: R$ in millions (except per-share data). Fiscal year ends Dec.
97
Ben Laidler (1-212) 622-5252
[email protected]
Latin America Equity Research November 2010
Soriana
Underweight
SORIANAB.MX www.soriana.com
Price Target: Ps38
Ps37.40 (9 Nov 10)
End Date: Dec 2011
Company description Organizacion Soriana is a food retailer operating 500 stores (as of 3Q10) across Mexico. The store formats are mostly hypermarkets, clubs and convenience stores. Investment case Our negative view on Soriana is due to a lack of catalysts in the short/middle term. Soriana has been experiencing weak sales growth despite easy comparisons. Last year, the company was hard hit by the economic downturn. We still see competition and cautious consumer purchase of discretionary categories in Mexico as dragging Soriana’s growth. Also, the stock is trading at rich valuations, at P/E 11e of 22.1x and EV/EBITDA 11e of 10.8x.
Mexico Retail & Healthcare Andrea Teixeira, CFA AC (1-212) 622-6735
[email protected] J.P. Morgan Securities LLC Bloomberg JPMA TEIXEIRA <GO>
Price Performance 38 Ps
Potential for earnings upgrades We see limited room for positive earnings surprises as the improvement in SSS performance expected for the 4Q10 and 2011 seems already priced into consensus. We expect Soriana to continue to face headwinds from heavy competition as (1) Walmex is aggressively lowering prices and has greater bargaining power with suppliers; (2) Fourth-largest competitor Chedraui is now well capitalized and is gaining share (SSS at 3Q10 stood at 4.4% vs. 2.9% for Soriana and 2.8% for Walmex). Prospects for re-/derating We believe further recovery is priced in, as Soriana is trading at significant premiums to its historical averages. At a 12-month forward P/E, the stock trades at 23.3x, a 44% premium, and 12-month fwd EV/EBITDA of 11.1x, 47% above historical, which in our view do not reflect the risks.
34 30 Nov-09
Feb-10
May-10
Aug-10
Nov-10
Source: Bloomberg.
Performance Absolute (%)
1M
3M
12M
4.4
9.1
17.5
Source: Bloomberg.
Priced as of the close on November 9, 2010; see our note out November 10 for further details.
Price target and risks Our Ps38 December 2011 price target is based on a 50/50 blend of a 9-year DCF at 7.4% nominal WACC, 4% growth and 16.8x P/E 12E (30% discount to peers). Upside risks to our cautious view include: (1) faster-than-anticipated recovery in the economy; and (2) better-than-anticipated execution, i.e., no market share losses.
Company Data Price (Ps) Date Of Price 52-week Range (Ps) Mkt Cap (Ps mn) Fiscal Year End Shares O/S (mn) Price Target (Ps) Price Target End Date
98
37.40 09 Nov 10 40.10 29.58 67,320.00 Dec 1,800 38.00 31 Dec 11
Organizacion Soriana (SORIANAB.MX;SORIANAB MM) 2009A 2010E EPS FY (Ps) 1.59 1.73 EV/EBITDA FY 11.3 10.5 P/E FY 23.5 21.6 EBITDA FY (Ps mn) 6,568 7,107 Source: Company data, Bloomberg, J.P. Morgan estimates.
2011E 2.06 9.3 18.2 7,837
2012E 2.21 8.5 17.0 8,418
Ben Laidler (1-212) 622-5252
[email protected]
Latin America Equity Research November 2010
Organizacion Soriana: Summary of Financials Income Statement
FY09A
FY10E
FY11E
FY12E
FY13E Balance Sheet
Revenues Cost of goods sold SG&A Operating Profit (EBIT) EBIT Margin Depreciation EBITDA EBITDA Margin Financial income Financial expense FX & Monetary gains (losses) Other Nonoperating income Equity income EBT Taxes Minority interest Extraordinary Net Income Net income margin EPS
88,637 (70,344) (13,710) 4,584 5.2% 1,984 6,568 7.4% 148 885 79 0 3,842 (974) 2,868 3.2% 1.59
93,853 (74,573) (14,225) 5,055 5.4% 2,052 7,107 7.6% 166 601 66 (4) 4,558 (1,423) 3,110 3.3% 1.73
100,365 (79,746) (14,909) 5,710 5.7% 2,127 7,837 7.8% 38 459 0 0 5,151 (1,442) 3,708 3.7% 2.06
107,127 (85,065) (16,040) 6,022 5.6% 2,396 8,418 7.9% 59 459 0 0 5,514 (1,544) 3,970 3.7% 2.21
115,242 (91,452) (17,303) 6,488 5.6% 2,626 9,114 7.9% 95 459 0 0 6,008 (1,682) 4,326 3.8% 2.40
Revenue growth EBITDA growth Net income growth FCF growth
(7.3%) 5.9% 6.9% 8.0% 8.2% 10.3% 66.4% 8.4% 19.3% (133.8%) (101.0%) (6104.7%)
6.7% 7.4% 7.1% (47.5%)
7.6% 8.3% 9.0% 170.4%
Cash Accounts receivable Inventories
2,139 1,119 1,301 2,114 2,263 3,305 4,384 4,667 4,981 5,359 11,084 13,207 13,817 14,505 15,344
Other current assets Net PP&E Other Assets Total assets Short-term debt Accounts payable Other current liabilities Long-term debt Deferred taxes Other liabilities Total liabilities Minority interest Shareholders' equity Liabilities + Equity
89 37,610 11,367 65,594 3,529 15,976 0 5,500 7,532 1,127 33,664 0 31,930 65,594
Net Debt Net Debt/Capital Debt/Capital Net Debt/EBITDA
6,889 7,512 5,331 4,517 4,368 16.8% 17.4% 11.9% 9.3% 8.3% 22.0% 20.0% 14.8% 13.7% 12.7% 1.0 1.1 0.7 0.5 0.5 FY09A FY10E FY11E FY12E FY13E
Operating Data, Ratios
FY09A
FY10E
FY11E
FY12E
FY13E Valuation, Macro
Capex Change in working capital Free Cash Flow Dividends Dividend % of net income Capex/Depreciation Capex/Sales Working capital Working capital/sales
1,164 (479) 4,141 0 0.0% 0.6 1.3% (1,498) (1.7%)
3,100 2,127 (41) 70 2.3% 1.5 3.3% 629 0.7%
3,655 (447) 2,459 260 7.0% 1.7 3.6% 182 0.2%
5,290 (451) 1,291 278 7.0% 2.2 4.9% (268) (0.3%)
6,752 (518) 3,490 303 7.0% 2.6 5.9% (786) (0.7%)
Sales Area (Sq,m) Floor Space Growth No. of Stores SSS growth (nominal terms) # of PL cards issued % of sales in 0+5x (no interest) % of sales on interest plans Bad Debt Provisions Personal Loans Portfolio Capex Maintenance Expansion
2,824,481 2,923,125 3,058,125 1.5% 2.5% 5.5% 471 511 566 (10.3%) (0.7%) 0.8% 1,164 -
3,100 -
3,655 -
EV/EBITDA P/E P/BV P/S FCF yield Dividend yield ROE Net income margin Net revenue/Assets Assets/Equity 3,253,981 3,515,043 ROIC 4.0% 7.2% Shares 634 718 ADRs 0.7% 0.7% - DCF - WACC - Perpetual Growth - Cost of equity - Cost of debt 5,290 -
FY09A FY10E FY11E FY12E FY13E
95 38,615 12,135 69,555 4,039 17,057 0 4,592 8,041 1,203 34,932 0 34,623 69,555
102 40,142 12,920 72,948 2,039 18,403 0 4,592 8,561 1,281 34,876 0 38,072 72,948
108 43,036 13,790 78,535 2,039 19,864 0 4,592 8,909 1,367 36,771 0 41,764 78,535
117 47,162 14,835 85,079 2,039 21,605 0 4,592 9,584 1,470 39,291 0 45,788 85,079
11.3 10.5 9.3 8.5 7.9 23.5 21.6 18.2 17.0 15.6 2.1 1.9 1.8 1.6 1.5 0.8 0.7 0.7 0.6 0.6 5.6% (0.1%) 3.4% 1.8% 4.9% 0.0% 0.1% 0.4% 0.4% 0.4% 9.3% 9.5% 10.2% 9.9% 9.9% 3.2% 3.3% 3.7% 3.7% 3.8% 1.4 1.3 1.4 1.4 2.1 2.0 1.9 1.9 5.7% 7.3% 8.2% 1,800 1,800 1,800 1,800 1,800 -
7.4% 4.0% 7.7% 4.1%
6,752 -
Source: Company reports and J.P. Morgan estimates. Note: Ps in millions (except per-share data). Fiscal year ends Dec
99
Ben Laidler (1-212) 622-5252
[email protected]
Latin America Equity Research November 2010
Telecom, Media & Technology Key country dynamics We believe investors should only have a selective exposure to the sector, either through highgrowth/underpenetrated market stories or through stocks offering a mix of growth and cash flow (like TSU/AMX). Generally, telecom stocks tend to be defensive, while media stocks are more cyclically exposed, as are tech stocks. We believe the telecom sector could offer attractive cash flow and dividend yields, compensating for slower growth. Media stocks fared better in earnings than developed peers as most of the media expenditure is still staple variety rather than discretionary. Tech stocks offer highest growth among TMT sector, as LatAm is still underpenetrated, with high demand. Growth characteristics and how they are changing Among telecom companies, growth is mainly driven by the increasing contribution from data revenues: companies are investing a large amount in data networks, and there will be a 3G license auction in Brasil (NIHD likely to be the only bidder) as there was in Mexico. Looking at media companies, we could see them grow, on increasing pay-TV penetration and also from the offer of combined services. Tech companies could benefit from good economic momentum, given higher demand. Drivers of returns – Multiples and growth TMT investors benefit from attractive cash flow yields as well as good dividend distribution, as the sector usually provides low growth for reasonable cash generation, and thus is considered defensive. We believe exposure should be taken in stocks with cheap FCF yield relative to EBITDA growth.
Andre Baggio AC (55-11) 3048-3427
[email protected] Banco J.P. Morgan S.A. Bloomberg JPMA BAGGIO <GO>
EV/EBITDA is a key metric for the sector . . . . 8
5.5
6
4.4
5 4
3.4
UW: Telmex (TMX): weak trends, demonstrated by double-digit EBITDA decline over the last six quarters; rich valuation relative to higher-growth LatAm peers; tough outlook, given rising competition in Mexico.
2.9
2 1 0 VIV
TSU
AMX ENTEL NIHD TEO
PT
TI
VOD
TEF
Source: J.P. Morgan estimates.
. . . and we should also look at FCF yields 20% 15%
15.1% 10.8%
10%
9.4%
11.4% 8.0%
10.3%
7.8%
7.0% 4.4%
5% 0% -1.2%
-5% VIV
TSU AMX ENTEL NIHD TEO
PT
TI
VOD TEF
Source: J.P. Morgan estimates.
Best combination: cheap FCF yield relative to EBITDA growth EBITDA CAGR 2011-2013E 15% 10%
TSU ENTEL
5%
AMX TEF
VIV VOD
PT
0%
TI
TEO 4%
6%
8%
10%
12%
14%
16%
2011 FCF yield Source: J.P. Morgan estimates.
EBITDA CAGR, 2011-2013e, for covered telecom stocks 15% 10%
14% 9% 6%
5%
5%
AMX
ENTEL
5% 0% -5% VIV
TSU
Source: J.P. Morgan estimates.
100
5.5
5.1
4.6
4.2
3
-5%
Recommendations OW: TIM Participações (TSU): only pure mobile player in Brazil, with the highest growth among Brazilian telcos; lower exposure to MTR changes; valuation of 9.3% FCF yield and 2.9 x EV/EBITDA 2011E.
7.2
6.4
7
NIHD
-3% TEO
Ben Laidler (1-212) 622-5252
[email protected]
Latin America Equity Research November 2010
Top pick and stock to avoid Price (US$) Top pick TIM Participacoes Stock to avoid Telmex
Code
Rating
Mkt cap (US$MM)
P/E (x) 10E
EPS 10E
11E
31.85
TSU
OW
7,900
29.4
14.3
0.19
15.02
TMX
UW
13,586
12.2
13.0
0.8
11E
Div. yield 11E (%)
0.4 0.7
ROE 11E (%)
1.7%
10%
5%
37%
Source: Bloomberg, J.P. Morgan estimates. Note: Share prices and valuations are as of October 28, 2010.
Telecom absolute and relative to MSCI LatAm
Telecom EPS integer 150
600
Absolute
Relativ e to MSCI EMF Index 140
500 400
130
300
120
200
110
100
100
0
2011
2010
90
Dec-02
Mar-04
May -05
Aug-06
Oct-07
Jan-09
Mar-10
Feb-09
Jul-09
Dec-09
May -10
Source: MSCI, Bloomberg, IBES, Datastream, J.P. Morgan.
Source: MSCI, Bloomberg, IBES, Datastream, J.P. Morgan.
Telecom 12 mth fwd PE
Telecom trailing PB
24
Oct-10
5
21 4
18 3
15 12
2
9
1
6
0
95
97
98
99
00 PE
01
02
03
04
Av g
Source: MSCI, Bloomberg, IBES, Datastream, J.P. Morgan.
05
06
+1SD
07
08
10
-1SD
95
97
98
99
00 PB
01
02
03
04
Av g
05
06
+1SD
07
08
10
-1SD
Source: MSCI, Bloomberg, IBES, Datastream, J.P. Morgan.
101
Ben Laidler (1-212) 622-5252
[email protected]
Latin America Equity Research November 2010
TIM Participacoes
Overweight
TSU www.tim.com.br
Price Target: $40
$32.21 (28 Oct 10)
End Date: Dec 2011
Company description TIM Participações S.A. (NYSE: TSU) provides telecommunication services all across Brazil. Most of its revenues come from mobile, and it also has long distance and data transmission services. TSU is controlled by the Telecom Italia group. Investment case TSU is our top pick: (i) turnaround to go on, demonstrated by better FCF; (ii) higher growth among Brazilian telcos; (iii) increasing presence as data service provider; (iv) lower MTR exposure, even when compared to VIV/TSP combined; (v) cheap valuation of 9.8% FCF yield 2011e and 2.8x EV/EBITDA (still cheap on ON+PNs, at 8.1%/3.4x). Potential for earnings upgrades We believe TSU could upgrade earnings if: (1) it maintains a high number of subscriber additions without substantial dilution in ARPU, (2) it is able to increase levels of data as % of service revenues toward the ones reported by Vivo and Claro, as well as improve its offer of data services; (3) it reduces advertisement expenses. Prospects for re-/derating The market could derate TSU, if: 1) results from the free on-net minutes strategy disappoint in ARPU; 2) competition increases with the entry of new players (5th license); and 3) capex rises as result of more voice or data traffic, depressing FCF.
Brazil Telecom, Media & Technology Andre Baggio AC (55-11) 3048-3427
[email protected] Banco J.P. Morgan S.A. Bloomberg JPMA BAGGIO <GO>
Price Performance 34 30 $ 26 22 Oct-09
Jan-10
Apr-10
Jul-10
Oct-10
Source: Bloomberg.
Performance Absolute (%)
1M
3M
12M
14%
27%
29%
Source: Bloomberg.
Price target and risks We rate TSU OW and our Dec 11 price target is $40 based on the average of our DCF and multiples valuation. Our DCF valuation is based on 9.4% WACC, 1.5% LT growth and yields, a $43.3 fair value. Our multiples-based valuation derives from a 10% target FCF yield, resulting in a fair value of $36.7. The downside risks are mentioned above. TIM Participacoes (TSU;TSU US) Company Data Price ($) Date Of Price 52-week Range ($) Mkt Cap ($ mn) Fiscal Year End Shares O/S (mn) Price Target ($) Price Target End Date Div. Yield Debt/Total Capital
102
32.21 28 Oct 10 34.13 22.49 7,974.34 Dec 248 40.00 31 Dec 11 1.5% 17.9%
Revenues FY (R$ mn) EBITDA FY (R$ mn) EBITDA Margin FY (R$) EPS FY (R$) Bloomberg EPS FY (R$) P/BV FY
2009A 13,907 3,571 26% 3.20 0.03 1.8
Source: Company data, Bloomberg, J.P. Morgan estimates.
2010E 14,406 4,195 29% 1.86 1.95 1.5
2011E 15,862 4,704 30% 3.84 4.07 1.5
2012E 17,220 5,111 30% 6.14 5.47 1.5
Ben Laidler (1-212) 622-5252
[email protected]
Latin America Equity Research November 2010
TIM Participacoes: Summary of Financials Income Statement Net Revenue Cash Costs EBITDA EBITDA margin Depreciation and Amortisation EBIT Net interest expense Other nonoperating income EBT Taxes Minority interest Extraordinary Net Income Adj. Net Income Shares Outstanding EPS Adj. EPS
FY09A FY10E FY11E FY12E FY13E Balance Sheet 13,907 14,406 15,862 17,220 18,348 Cash -10,336 -10,211 -11,158 -12,110 -12,879 Accounts receivable 3,571 4,195 4,704 5,111 5,469 Inventories 26% 29% 30% 30% 30% Other current assets -3,141 -3,198 -3,149 -2,989 -2,883 Net PP&E 444 997 1,555 2,121 2,586 Other Assets 253 -278 -187 -32 -32 Total assets 0 0 0 0 0 Short-term debt 697 719 1,368 2,089 2,554 Accounts payable -6 -259 -419 -568 -608 Other current liabilities 0 0 0 0 0 Long-term debt - Deferred taxes 691 460 949 1,521 1,946 Other liabilities 691 460 949 1,521 1,946 Total liabilities 2,476 2,476 2,476 2,476 2,476 Minority interest 3.20 1.86 3.84 6.14 7.87 Shareholders' equity 2.79 1.86 3.84 6.14 7.87 Liabilities + Equity
FY09A FY10E FY11E FY12E 2,559 1,852 2,040 2,214 2,480 2,881 3,172 3,444 406 248 273 296 1,321 1,662 1,824 1,975 5,323 5,333 4,984 4,795 5,360 5,341 5,341 5,341 17,450 17,317 17,634 18,066 1,417 1,597 1,597 1,597 0 0 0 0 4,320 4,607 5,066 5,493 2,743 1,502 642 816 1,013 709 698 715 -365 118 129 112 9,127 8,533 8,131 8,732 0 0 0 0 8,323 8,785 9,504 9,333 17,450 17,317 17,634 18,066
Revenue growth EBITDA growth Net income growth FCF growth
5.8% 3.6% 10.1% 23.2% 17.5% 12.1% 249.8% -33.4% 106.3% -72.1% -605.5% 125.7%
1,684 1,317 269 269 269 1,684 1,317 39 -1,652 -3,590 9.6% 7.6% 1.5% 1.5% 1.4% 23.8% 17.9% 12.7% 13.4% 13.8% 0.5 0.3 0.1 0.1 0.0
Operating Data, Ratios Capex Change in working capital Free Cash Flow Equity Dividends/Share Dividend % of net income Consolidated Dividends Sharebuybacks Capex/Depreciation Capex/Sales Working capital Working capital/sales Net income margin
FY09A -2,671 -243 -112 0.68 24.3% 168 0 0.9 19.2% 111 0.8% 5.0%
Lines in Service Broadband Subs Broadband Net Adds Mobile Subs Mobile Net Adds Mobile ARPU Mobile MOU PayTV subs
0 0 0 41,115 4,713 26.54 83 0
Fx, Avg Quarterly Data Revenue Net Income EPS
1.99 1Q10A 3,296 30 0.13
8.6% 8.7% 60.2% 32.3%
6.5% 7.0% 28.0% 14.6%
Net Debt Adj. Net Debt Net Debt/Capital Debt/Capital Net Debt/EBITDA
FY10E FY11E FY12E FY13E Valuation, Macro -3,000 -2,800 -2,800 -2,876 EV/EBITDA -90 -20 -19 -16 Adj. P/E 566 1,278 1,691 1,938 P/BV 0.82 0.93 6.83 7.83 44.3% 24.3% 111.2% 99.6% FCF yield 204 230 1,691 1,938 Dividend yield 0 0 0 0 ROE 0.9 0.9 0.9 1.0 Net revenue/Assets 20.8% 17.7% 16.3% 15.7% Assets/Equity 201 221 240 256 1.4% 1.4% 1.4% 1.4% ROIC 3.2% 6.0% 8.8% 10.6% Shares ADRs 0 0 0 0 0 0 0 0 0 0 0 0 WACC 48,052 52,857 57,085 60,510 Perpetual Growth 6,937 4,805 4,229 3,425 Cost of equity 24.58 23.65 23.42 23.42 Cost of debt 0 0 0 0 Subsidiary Share 0 0 0 0 1.79
1.83
1.88
2Q10A 3Q10E 4Q10E 3,559 3,680 3,870 101 121 208 0.41 0.48 0.84
FY13E 2,359 3,670 316 2,101 4,788 5,341 18,574 1,597 0 5,848 961 715 111 9,232 0 9,342 18,574
FY09A FY10E FY11E FY12E FY13E 4.7 3.5 3.0 2.5 2.0 19.7 29.5 14.3 8.9 7.0 1.8 1.5 1.5 1.5 1.6 -0.7% 1.2% 8.3% 0.8 2.1
4.2% 9.2% 11.9% 13.3% 1.5% 1.7% 12.4% 14.3% 5.2% 10.0% 16.3% 20.8% 0.8 0.9 1.0 1.0 2.0 1.9 1.9 2.0
3.5% 2,476 248
6.2% 2,476 248
9.7% 13.2% 16.6% 2,476 2,476 2,476 248 248 248
9.6% 1.5% 10.8% 5.2% 0.0%
1.92 Quarterly Data Revenue Net Income EPS
1Q11E 2Q11E 3Q11E 4Q11E -
Source: Company reports and J.P. Morgan estimates. Note: R$ in millions (except per-share data). Fiscal year ends Dec.
103
Ben Laidler (1-212) 622-5252
[email protected]
Latin America Equity Research November 2010
Telmex
Underweight
TMX www.telmex.com
Price Target: $12
$15.15 (28 Oct 10)
End Date: Dec 2011
Company description Telmex provides fixed-line telecommunications services in Mexico. The company’s service coverage comprises the operation of the nation’s most complete local and long distance networks. Additionally, Telmex offers services such as connectivity, internet access, co-location, web hosting and interconnection services to other telecommunications operators. Investment case The key reasons for our UW rating are: (1) Continuing weak core trends at TMX as demonstrated by double-digit EBITDA decline over the last six quarters; (2) Likelihood of adverse regulation hurting trends further; (3) Less alignment with Carlos Slim, given recent AMX-CGT-TII transaction, which lowered his effective stake in TMX significantly; (4) Rising competition in Mexico, especially from cable operators. Potential for earnings upgrades We believe TMX could upgrade earnings if it is able to control costs, which have increased in line with inflation although revenues have been declining. Moreover, TMX could get a pay-TV license, which would help trends. Prospects for re-/derating The market could rerate TMX, if trends improved or if there is an expectation of a tender offer for minorities from its controlling shareholder AMX at a premium to market price. No such offer has been announced.
Mexico Telecom, Media & Technology Andre Baggio AC (55-11) 3048-3427
[email protected] Banco J.P. Morgan S.A. Bloomberg JPMA BAGGIO <GO>
Price Performance 19 17 $ 15 13 Oct-09
Jan-10
Apr-10
Jul-10
Oct-10
Source: Bloomberg.
Performance 1M Absolute (%)
2%
3M -1%
12M -18%
Source: Bloomberg.
Price target and risks Our PT of US$12 is based on a combination of DCF ($14.1 value), growth model ($10.1) and multiples ($11.5). Our DCF methodology and uses a WACC of 10.4%, LT growth of -1% and LT margin of 39%. We rate TMX UW in light of weak trends, rich valuation relative to higher-growth LatAm peers, and a tough outlook. Upside risks to our rating are the same as the ones mentioned in the above paragraph (better trends, a tender from AMX).
Telmex SA (TMX;TMX US) Company Data Price ($) Date Of Price 52-week Range ($) Mkt Cap ($ mn) Fiscal Year End Shares O/S (mn) Price Target ($) Price Target End Date Div. Yield Debt/Total Capital
104
15.15 28 Oct 10 18.48 13.00 13,779.68 Dec 910 12.00 31 Dec 11 5.4% 60.2%
Revenues FY (Ps mn) EBITDA FY (Ps mn) EBITDA Margin FY (Ps) EPS FY (Ps) P/BV FY P/E FY
2009A 119,100 52,315 44% 22.28 4.7 8.4
Source: Company data, Bloomberg, J.P. Morgan estimates.
2010E 112,804 45,385 40% 18.51 4.7 10.1
2011E 108,244 42,811 40% 17.30 4.8 10.8
2012E 103,133 40,308 39% 15.23 7.6 12.3
Ben Laidler (1-212) 622-5252
[email protected]
Latin America Equity Research November 2010
Telmex SA: Summary of Financials Income Statement Net Revenue Cash Costs EBITDA EBITDA margin Depreciation and Amortisation EBIT Net interest expense Other nonoperating income EBT Taxes Minority interest Extraordinary Net Income Adj. Net Income Shares Outstanding EPS Adj. EPS
FY09A FY10E FY11E FY12E FY13E Balance Sheet Cash Accounts receivable Inventories Other current assets Net PP&E Other Assets Total assets Short-term debt Accounts payable Other current liabilities Long-term debt Deferred taxes Other liabilities Total liabilities Minority interest Shareholders' equity Liabilities + Equity
14,380 0 0 37,456 104,305 22,214 178,355 19,769 0 17,519 83,105 0 19,641 140,034 0 38,321 178,355
Net Debt Adj. Net Debt Net Debt/Capital Debt/Capital Net Debt/EBITDA
88,494 89,379 83,871 78,541 72,832 121,494 110,716 97,055 84,803 72,846 49.6% 53.6% 52.9% 52.0% 49.8% 57.7% 60.2% 59.8% 59.2% 57.3% 1.7 2.0 2.0 1.9 1.9
Operating Data, Ratios
FY09A FY10E FY11E FY12E FY13E Valuation, Macro
FY09A FY10E FY11E FY12E FY13E
Capex Change in working capital Free Cash Flow Equity Dividends/Share Dividend % of net income Consolidated Dividends Sharebuybacks Capex/Depreciation Capex/Sales Working capital Working capital/sales Net income margin
-9,001 -10,000 -9,596 -9,143 -8,825 EV/EBITDA 963 -5,493 831 1,047 734 Adj. P/E 29,480 19,592 22,209 20,388 18,822 P/BV 16.42 10.02 9.88 9.48 8.02 73.7% 52.7% 56.8% 62.0% 49.5% FCF yield 15,093 8,803 8,547 8,136 6,865 Dividend yield 4,095 6,074 2,553 1,322 648 ROE 0.5 0.6 0.6 0.6 0.7 Net revenue/Assets 7.6% 8.9% 8.9% 8.9% 8.9% Assets/Equity 19,937 15,491 14,932 14,227 13,732 16.7% 13.7% 13.8% 13.8% 13.8% ROIC 17.2% 14.8% 13.9% 12.7% 13.9% Shares ADRs 15,882 15,509 15,124 14,671 14,231 6,524 7,349 8,112 8,598 8,770 1,514 825 763 487 172 WACC 0 0 0 0 0 Perpetual Growth 0 0 0 0 0 Cost of equity 0.00 0.00 0.00 0.00 0.00 Cost of debt 0 0 0 0 0 Subsidiary Share 0 0 0 0 0
Revenue growth EBITDA growth Net income growth FCF growth
Lines in Service Broadband Subs Broadband Net Adds Mobile Subs Mobile Net Adds Mobile ARPU Mobile MOU PayTV subs Fx, Avg
119,100 -66,785 52,315 44% -17,943 34,372 -5,411 0 28,963 -8,486 0 0 20,477 16,506 18,383 22.28 18.50
112,804 -67,419 45,385 40% -17,357 28,028 -5,546 0 23,858 -7,157 0 0 16,700 13,403 17,564 18.51 14.70
-4.0% -5.3% -9.3% -13.2% 1.5% -18.4% -4.0% -33.5%
13.50
12.68
108,244 -65,433 42,811 40% -16,424 26,388 -5,789 0 21,209 -6,151 0 0 15,058 12,435 17,296 17.30 14.21
103,133 -62,825 40,308 39% -14,836 25,473 -5,871 0 18,733 -5,620 0 0 13,113 11,164 17,170 15.23 13.00
99,549 -60,853 38,696 39% -12,511 26,186 -5,498 0 19,794 -5,938 0 0 13,856 12,580 17,115 16.19 14.67
-4.0% -4.7% -5.7% -5.8% -9.8% -12.9% 13.4% -8.2%
-3.5% -4.0% 5.7% -7.7%
FY09A FY10E FY11E FY12E FY13E
12.35
12.38
10,958 0 0 38,503 97,170 20,103 166,735 3,790 0 23,012 96,547 0 8,326 131,676 0 35,059 166,735
10,958 0 0 37,113 90,343 20,103 158,516 3,790 0 22,181 91,039 0 8,326 125,337 0 33,180 158,516
10,958 0 0 35,361 84,650 20,103 151,071 3,790 0 21,134 85,709 0 19,174 129,807 0 21,264 151,071
10,958 0 0 34,132 80,964 20,103 146,157 3,790 0 20,400 80,000 0 19,174 123,364 0 22,793 146,157
5.8 10.1 4.7
6.1 12.7 4.7
6.0 13.2 4.8
6.1 14.4 7.6
6.2 12.8 7.3
13.1% 8.8% 53.4% 0.7 4.7
9.0% 5.4% 47.6% 0.7 4.8
11.5% 5.3% 45.4% 0.7 4.8
10.8% 5.1% 61.7% 0.7 7.1
10.3% 4.3% 60.8% 0.7 6.4
18.3% 15.4% 15.8% 17.9% 19.0% 18,383 17,564 17,296 17,170 17,115 919 878 865 858 856 10.4% -1.0% 11.1% 4.2%
12.65
Source: Company reports and J.P. Morgan estimates. Note: Ps in millions (except per-share data). Fiscal year ends Dec.
105
Ben Laidler (1-212) 622-5252
[email protected]
Latin America Equity Research November 2010
Utilities Key sector dynamics In Brazil, the main sector drivers for 2011 should be: (1) inflation. If inflation expectations increase in 2011, most companies in the sector provide a hedge due to indexed tariffs; (2) energy prices. With long-term electricity supply-vs.-demand balance still comfortable, free market prices seem capped for the near term, limiting upside to generators. Outcome of new capacity auctions will give the market more visibility on balance and price trend; (3) regulation. The pending issue of concession renewals might be tackled in 2011; additionally, while water companies are expected to benefit from new regulation, uncertainty should be high for power discos as they start their 3rd cycle of tariff resets. Overall, we remain lukewarm on the sector outlook for 2011 and recommend investors to selectively focus on individual cases of potential regulatory upside and stocks that provide inflation hedges. In Chile, expectation of tight reserve margin in 2011 means thinner margins for generators (especially heavily hydro-based) and overall growth outlook remains uncertain for major players. Growth characteristics and how they are changing Despite the high demand growth and increased need for new capacity, auction for greenfield projects should remain competitive, thereby limiting the upside for generators. Discos should also benefit less from demand growth in the future due to recent changes in tariff regulation. Drivers of returns – Multiples and growth Valuation discount of Brazilian to global utilities is sustained by high local interest rates, and we do not expect this to change in 2011. Major potential for rederatings will come from regulatory changes. Although cost cutting and M&A are potential drivers for power discos, we are skeptical on execution during 2011. Recommendations Our top picks among Latin American utilities are: Brazilian water utility Copasa (CSMG3) due to expected rerating coming from a new tariff framework, and Brazilian power utility AES Tiete (GETI4) due to earnings stability, high dividend yield and inflation hedge on revenues. We recommend that investors avoid Brazilian power utility Eletropaulo (ELPL6), due to the risk related to the tariff reset process in July 2011 and potential nonrecurring R$1bn liability, and vertical Brazilian utility CPFL Energia (CPFE3), due to relatively expensive valuation.
106
Anderson Frey AC (1-212) 622-6615
[email protected] J.P. Morgan Securities LLC Bloomberg JPMA FREY <GO>
Inflation expectations in Brazil for 12M forward In % 6.5 6.0
IPCA
IGPM
Apr-09
Jul-09
5.5 5.0 4.5 4.0 3.5 Jan-09
Oct-09
Jan-10
Apr-10
Jul-10
Oct-10
Source: Brazilian Central Bank consensus.
Forecast of reserve margin in Brazil for electricity In % of total sector assured generation capacity 15 gov ernment
alternativ e w ith some project delay s
alternativ e w ith some project cancellations
10 5 0 -5 -10 2010e
2011e
2012e
2013e
2014e
2015e
2016e
2017e
2018e
2019e
Source: EPE and J.P. Morgan estimates.
Global utilities valuation 2011E P/E and EV/EBITDA, see our weekly report for list of companies 16
2011e P/E
2011e EV/EBITDA
14 12 10 8 6 4 Brazil
Chile
Asia Pacific
Europe
USA
Source: J.P. Morgan estimates. Priced as of 28-Oct.-2010.
Declining regulatory returns for power utilities After-tax, real, regulated WACC for Brazilian utilities 12%
11.26% 9.18%
10%
9.95%
8%
7.24%
7.15%
Transcos 2009-13
Discos 2011-14
6% 4% 2% 0% Discos 2003-05
Source: ANEEL.
Transcos 2005-09
Discos 2007-10
Ben Laidler (1-212) 622-5252
[email protected]
Latin America Equity Research November 2010
Top picks and stocks to avoid
Top picks Copasa AES Tiete Stocks to avoid Eletropaulo CPFL Energia
P/E (x)
EPS
Price
Code
Rating
Mkt cap (US$MM)
10E
11E
10E
11E
Div. yield 11E (%)
ROE 11E (%)
26.4 23.5
CSMG3 GETI4
OW OW
1,783 5,246
6.4 10.7
6.0 9.8
4.13 2.19
4.39 2.38
8.3 10.7
12.0 181.4
29.9 40.4
ELPL6 CPFE3
UW UW
2,936 11,368
4.8 13.7
8.5 13.9
6.29 2.94
3.54 2.90
12.3 5.4
18.0 25.3
Source: Bloomberg, J.P. Morgan estimates. Note: Share prices and valuations are as of October 28, 2010.
Utilities absolute and relative to MSCI LatAm
Utilities EPS integer 180
800
Absolute
Relativ e to MSCI EMF Index
700
170 160
600
2011
150
500
140
400
130
300
120
200
110
100
100
0
2010
90
Dec-02
Mar-04
May -05
Aug-06
Oct-07
Jan-09
Mar-10
Feb-09
Jul-09
Dec-09
May -10
Source: MSCI, Bloomberg, IBES, Datastream, J.P. Morgan.
Source: MSCI, Bloomberg, IBES, Datastream, J.P. Morgan.
Utilities 12 mth fwd PE
Utilities trailing PB
30
Oct-10
1.4 1.2
25
1
20
0.8
15
0.6 0.4
10
0.2
5
0
95
97
98
99
00 PE
01
02
03
04
Av g
Source: MSCI, Bloomberg, IBES, Datastream, J.P. Morgan.
05
06
+1SD
07
08
10
-1SD
95
97
98
99
00 PB
01
02
03
04
Av g
05
06
+1SD
07
08
10
-1SD
Source: MSCI, Bloomberg, IBES, Datastream, J.P. Morgan.
107
Ben Laidler (1-212) 622-5252
[email protected]
Latin America Equity Research November 2010
COPASA
Overweight
CSMG3.SA www.copasa.com.br
Price Target: R$34
R$26.35 (28 Oct 10)
End Date: Dec 2011
Company description Controlled by the state government of Minas Gerais in Brazil, COPASA (CSMG3) is a water utility providing water distribution for 603 municipalities (population of 13.8mn) and sewage collection for 156 municipalities (population of 7.8mn) in the state. Investment case CSMG3 trades at a valuation discount to peer SABESP, global water utilities and Brazilian electric utilities, mainly due to the lack of a regulatory framework in which the company’s capex is properly remunerated by marketbased return rates. Nevertheless, a regulatory agency was created in the state and is expected to develop a new and market-friendly tariff framework during 2011, to be implemented by Mar 2012. Additionally, COPASA benefits from high cost efficiency relative to peers, high corporate governance, high volume growth prospects and a high dividend yield (2010e at 7.8%).
Brazil Utilities Anderson Frey AC (1-212) 622-6615
[email protected] J.P. Morgan Securities LLC Bloomberg JPMA FREY <GO>
Price Performance 36 32 R$ 28 24 20 Nov-09
Potential for earnings upgrades For 2011, positive surprises on earnings could come from: (1) sales volume growth above our 9.5% estimate; and (2) tariff adjustment above inflation in March. For the long term, since there is still uncertainty regarding the final design of the new tariff framework, we chose to be more conservative and assume a mild tariff reset of +2.3% in March 2012 (i.e., below inflation). Earnings upside could come from a better outcome.
Feb-10
May-10
Aug-10
Nov-10
Source: Bloomberg.
Performance 1M
3M
12M
Absolute (%)
3.2
5.5
-15.9
Relative (%)
-1.5
-2.9
-25.6
Source: Bloomberg and J.P. Morgan.
Prospects for re-/derating While globally water utilities trade at a valuation premium to electric utilities, in Brazil CSMG3 currently trades at a significant discount to electricity peers. We expect valuation convergence under a new tariff framework. Price target and risks We have a DCF-based 2011YE price target of R$34, with 9.1% real cost of equity and 0% perpetuity growth. The main risks are: (1) worse-than-expected tariff reset; (2) sales volume growth for 2011 below our expectation; (3) belowinflation tariff adjustment in Mar 2011; (4) lower-than-50% earnings payout; and (5) high increases in operating costs.
Company Data Price (R$) Date Of Price 52-week Range (R$) Mkt Cap (R$ mn) Fiscal Year End Shares O/S (mn) Price Target (R$) Price Target End Date Div. Yield Debt/Total Capital
108
26.35 28 Oct 10 34.25 20.95 3,038.16 Dec 115 34.00 31 Dec 11 7.8% 45.4%
Cia Saneamento Minas Gerais (CSMG3.SA;CSMG3 BZ) 2010E 2009A Revenues FY (R$ mn) 2,229 2,332 EBITDA FY (R$ mn) 939 951 EBITDA Margin FY (R$) 42.1% 40.8% EPS Reported FY (R$) 4.73 4.13 Bloomberg EPS FY (R$) 4.18 4.11 P/E FY 5.6 6.4 P/BV FY 0.8 0.8
2011E 2,589 1,074 41.5% 4.39 4.00 6.0 0.7
2012E 2,874 1,152 40.1% 3.80 4.00 6.9 0.7
Source: Company data, Bloomberg, J.P. Morgan estimates. 'Bloomberg' above denotes Bloomberg consensus estimates.
2013E 3,188 1,267 39.7% 4.13 6.4 0.6
Ben Laidler (1-212) 622-5252
[email protected]
Latin America Equity Research November 2010
COPASA: Summary of Financials Income Statement
FY09A FY10E FY11E FY12E FY13E Balance Sheet
Net Revenues Cost and Expenses EBITDA EBITDA margin (%) Depreciation EBIT Net Financial Result FX & Monetary gains (losses) Non-operating income EBT Taxes Minority interest Net income Net Margin (%) Shares EPS
2,229 (1,546) 939 42.1% (256) 683 13 (2) 0 522 (148) 0 546 24.5% 115 4.73
Operating Data, Ratios
FY09A FY10E FY11E FY12E FY13E Valuation, Macro
FY09A FY10E FY11E FY12E FY13E
Change in working capital Capex FCFF FCFE Dividends Dividend % of net income Net debt to EBITDA Net Debt to Equity Current ratio Interest Coverage Capex/depreciation Net Margin (%) Revenues/Assets Assets/Equity ROE (%)
(54) (1,045) (309) (52) 158 29.0% 2.2 54.5% 1.5 (69.6) 4.1 24.5% 0.3 1.9 14.6%
960.7 1009.6 1105.6 1192.3 1264.5 5,242 5,549 6,512 6,946 7,595 2.6 2.6 2.6 2.7 2.8 11,540 11,655 11,655 11,655 11,655
2,332 (1,648) 951 40.8% (267) 684 (42) (8) 0 425 (157) 0 476 20.4% 115 4.13
(21) (950) (178) (76) 238 50.0% 2.6 63.0% 1.0 22.4 3.6 20.4% 0.3 1.8 12.0%
2,589 2,874 3,188 Cash (1,787) (1,991) (2,213) Accounts receivable 1,074 1,152 1,267 Other current assets 41.5% 40.1% 39.7% Long Term assets (272) (268) (293) Net fixed assets 802 883 975 Total assets (112) (252) (290) Short-term debt (4) (25) (25) Accounts payable 0 0 1 Other current liabilities 460 406 442 Long-term debt (181) (168) (183) Other long-term liabilities 0 1 2 Total liabilities 506 438 476 Minority interest 19.5% 15.2% 14.9% Shareholders' equity 115 115 115 Liabilities + Equity 4.39 3.80 4.13 Net debt
(61) (64) (71) Sales (million m3) (800) (836) (874) Connections 58 84 140 Avg.Tariff ($/m3) 303 189 236 # employees 253 219 238 50.0% 50.0% 50.0% FX rate (eop) 2.6 2.8 2.9 Inflation (%) 67.2% 73.2% 78.3% GDP growth (%) 1.1 1.1 1.2 Interest Rates (%,eop) 9.6 4.6 4.4 2.9 3.1 3.0 EV/EBITDA 19.5% 15.2% 14.9% P/E 0.3 0.3 0.3 P/BV 1.9 1.9 2.0 FCFE yield (%) 12.0% 9.9% 10.2% Dividend yield
FY09A FY10E FY11E FY12E FY13E 415 404 112 967 5,025 6,923 201 97 327 1,709 858 3,191 0 3,731 6,923 2,035
48 423 112 977 5,708 7,267 201 103 273 1,861 858 3,297 0 3,970 7,267 2,501
73 469 112 999 6,236 7,889 201 112 273 2,222 858 3,666 0 4,223 7,889 2,837
41 521 112 1,025 6,804 8,502 201 124 273 2,583 879 4,061 0 4,442 8,502 3,250
39 578 112 1,053 7,385 9,166 201 138 273 2,973 901 4,487 0 4,680 9,166 3,664
1.74 1.75 1.85 1.93 (1.7%) 9.2% 5.2% 4.5% (0.2%) 7.5% 4.5% 4.0% 8.8% 10.8% 12.5% 10.5%
2.00 4.5% 4.0% 9.5%
5.7 5.6 5.0 5.5 6.3 5.9 0.8 0.8 0.7 (1.7%) (2.5%) 10.0% 5.3% 7.9% 8.4%
4.2 6.3 0.7 7.8% 7.9%
4.6 6.9 0.7 6.2% 7.3%
Source: Company reports and J.P. Morgan estimates. Note: R$ in millions (except per-share data). Fiscal year ends Dec.
109
Ben Laidler (1-212) 622-5252
[email protected]
Latin America Equity Research November 2010
ELETROPAULO
Underweight
ELPL6.SA www.eletropaulo.com.br
Price Target: R$30
R$29.90 (28 Oct 10)
End Date: Dec 2011
Company description Controlled by the US utility AES and BNDES (Brazilian Development Bank), Eletropaulo (ELPL6 BZ) is a pure power distribution company that owns the concession for the metropolitan area of Sao Paulo city and serves 6.0 million customers (9% market share in Brazil).
Brazil Utilities Anderson Frey AC (1-212) 622-6615
[email protected] J.P. Morgan Securities LLC
Investment case We believe that the stock’s performance in 2011 should be capped by the following potential negative drivers: (1) increased likelihood of a cash disbursement of ~ R$1.1bn in the judicial dispute with Brazilian utility Eletrobras; and (2) uncertainty regarding the outcome of the July 2011 tariff reset. Moreover, we expect sustainable dividend yields to decrease post 2011 to levels below of those of more predictable utilities in Brazil, which is a major negative since a high dividend yield has been for years one of the highlights of ELPL6’s investment case.
Bloomberg JPMA FREY <GO>
Price Performance 40 36 R$ 32 28 Nov-09
Potential for earnings upgrades Since the potential cash disbursement of R$1.1bn in the judicial dispute with Eletrobras is not yet included in our estimates, this represents the single highest downside risk for 2011 earnings. The second major source of downside (or upside) is the outcome of the July 2011 tariff reset. We assumed a 1.6% tariff increase allowed by the regulator.
Feb-10
May-10
Aug-10
Nov-10
Source: Bloomberg.
Performance 1M
3M
Absolute (%)
-1.0
-10.3
12M 8.0
Relative (%)
-5.7
-18.6
-1.8
Source: Bloomberg and J.P. Morgan.
Prospects for re-/derating ELPL6 currently trades at similar valuation levels to other power utilities in Brazil. Although we do not expect this to change in the near future, we do expect a relevant reduction in profitability after the July 2011 tariff reset. Price target and risks We have a DCF-based 2011YE price target of R$30, with 10.0% real cost of equity and 0% perpetuity growth. The main risks: (1) a better-than-expected outcome from the July 2011 tariff reset; (2) lower-than-expected expense with pension liability; (3) a favorable resolution to the ~R$1.1bn debt dispute with Eletrobras; (4) steep reduction in controllable costs; and (5) a sooner-thanexpected restart of the sale process of a controlling stake by BNDES.
Company Data Price (R$) Date Of Price 52-week Range (R$) Mkt Cap (R$ mn) Fiscal Year End Shares O/S (mn) Price Target (R$) Price Target End Date Div. Yield Debt/Total Capital
110
29.90 28 Oct 10 39.98 28.76 5,003.59 Dec 167 30.00 31 Dec 11 21.8% 71.7%
ELETROPAULO (ELPL6.SA;ELPL6 BZ) 2009A Revenues FY (R$ mn) 8,050 EBITDA FY (R$ mn) 1,573 EBITDA Margin FY (R$) 19.5% EPS Reported FY (R$) 6.35 Bloomberg EPS FY (R$) 5.45 P/E FY 4.7 P/BV FY 1.5
2010E 8,758 1,983 22.6% 6.29 6.16 4.8 1.5
2011E 8,931 1,353 15.2% 3.54 4.02 8.5 1.5
2012E 9,439 1,340 14.2% 3.11 3.36 9.6 1.5
Source: Company data, Bloomberg, J.P. Morgan estimates. 'Bloomberg' above denotes Bloomberg consensus estimates.
2013E 10,118 1,459 14.4% 3.18 9.4 1.5
Ben Laidler (1-212) 622-5252
[email protected]
Latin America Equity Research November 2010
ELETROPAULO: Summary of Financials Income Statement Net Revenues Cost and Expenses EBITDA EBITDA margin (%) Depreciation EBIT Net Financial Result FX & Monetary gains (losses) Non-operating income EBT Taxes Minority interest Net income Shares EPS Change in working capital Capex FCFF FCFE Dividends Dividend payout (%)
FY09A FY10E FY11E FY12E FY13E Balance Sheet
FY09A FY10E FY11E FY12E FY13E
8,050 8,758 8,931 9,439 10,118 Cash 1,249 931 669 419 213 (6,477) (6,776) (7,578) (8,100) (8,660) Accounts receivable 1,434 1,363 1,396 1,475 1,581 1,573 1,983 1,353 1,340 1,459 Other current assets 959 999 899 799 799 19.5% 22.6% 15.2% 14.2% 14.4% Long Term assets 1,505 1,360 1,331 1,331 1,331 (382) (398) (400) (414) (427) Net PP&E 6,699 6,916 7,136 7,355 7,574 1,192 1,585 953 926 1,032 Other fixed assets 10 10 10 10 10 5 (112) (158) (251) (262) Total assets 11,855 11,578 11,439 11,388 11,507 224 9 (11) 0 0 Short-term debt 624 115 300 300 300 0 75 75 75 0 Accounts payable 830 836 868 918 984 1,421 1,557 859 750 770 Other current liabilities 2,225 1,791 1,679 1,579 1,579 (357) (505) (267) (230) (237) Long-term debt 1,505 1,360 1,331 1,331 1,331 - Other long-term liabilities 3,391 4,196 3,980 3,978 3,978 1,063 1,053 592 520 533 Total liabilities 8,574 8,297 8,158 8,106 8,172 167 167 167 167 167 Minority interest 0 0 0 0 0 6.35 6.29 3.54 3.11 3.18 Shareholders' equity 3,281 3,281 3,281 3,281 3,335 Liabilities + Equity 11,855 11,578 11,439 11,388 11,507 160 510 (47) (30) (40) (516) (615) (620) (633) (646) Net debt 3,999 3,742 3,999 4,248 4,454 861 1,448 532 519 523 Net debt to EBITDA 2.5 1.9 3.0 3.2 3.1 1,406 1,533 256 274 299 Net Debt to Equity 121.9% 114.1% 121.9% 129.5% 133.6% 1,080 1,053 592 520 480 Current ratio 1.0 1.2 1.0 1.0 0.9 101.6% 100.0% 100.0% 100.0% 90.0% Interest Coverage (318.9) 17.8 8.6 5.3 5.6
Operating Data, Ratios
FY09A FY10E FY11E FY12E FY13E Valuation, Macro
FY09A FY10E FY11E FY12E FY13E
Nominal Capacity (avg MW) Distribution Customers ('000) Distribution Demand (GWh) Avg.GenerationTariff ($/MWh) Avg.Regulated Disco Tariff ($/MWh) # employees Net RAB
- FX rate (eop) 6,036 6,279 6,524 6,774 7,029 Inflation (%) 34,436 35,965 37,156 38,456 39,802 GDP growth (%) - Interest Rates (%,eop) 437.4 454.4 461.4 470.9 486.8 4,360 4,360 4,360 4,360 4,360 EV/EBITDA 5,522 5,892 6,283 6,554 6,816 P/E P/BV 1.4 1.5 1.5 1.5 1.5 FCFE yield (%) 1,846 2,009 2,048 2,165 2,321 Dividend yield 13.2% 12.0% 6.6% 5.5% 5.3% 67.9% 75.6% 78.1% 82.9% 87.9% genco EV/kW capacity 3.6 3.5 3.5 3.5 3.5 disco EV/customer 32.4% 32.1% 18.0% 15.8% 16.0% discoEV/Net RAB
1.74 1.75 1.85 1.93 2.00 (1.7%) 9.2% 5.2% 4.5% 4.5% (0.2%) 7.5% 4.5% 4.0% 4.0% 10.1% 10.0% 12.1% 11.1% 10.0%
Capex/depreciation Revenue/Employee ('000) Net Margin (%) Revenues/Assets (%) Assets/Equity ROE (%)
5.2 4.1 6.1 6.1 5.6 4.7 4.7 8.4 9.6 9.3 1.5 1.5 1.5 1.5 1.5 28.1% 30.6% 5.1% 5.5% 6.0% 22.5% 22.0% 12.4% 10.8% 10.0% 1.4 1.5
1.3 1.4
1.3 1.3
1.2 1.2
0.7 0.7
Source: Company reports and J.P. Morgan estimates. Note: R$ in millions (except per-share data). Fiscal year ends Dec.
111
Ben Laidler (1-212) 622-5252
[email protected]
112
Latin America Equity Research November 2010
Ben Laidler (1-212) 622-5252
[email protected]
Latin America Equity Research November 2010
Economics and Commodities
Ben Laidler (1-212) 622-5252
[email protected]
114
Latin America Equity Research November 2010
Ben Laidler (1-212) 622-5252
[email protected]
Latin America Equity Research November 2010
Global Economic Outlook • • • • •
Global GDP growth slowdown may have already bottomed. Data flow has been generally positive, with our global PMIs signaling a slight pickup in growth this quarter. Global GDP growth in 2011 revised up a touch, the first upward revision since April. Inflation pressures muted well past 2011 in the major developed economies; return to target unlikely. Fed and BoJ open quantitative easing spigot, BoE likely to follow by early next year.
Laying the seeds for 1H11 acceleration We are becoming more confident that the seeds are being sowed for a lift to above-trend growth starting in 1H11. The latest developments in the US, Europe and Asia all suggest that earlier drags are fading. And while midyear shocks will reverberate through production plans as firms slow the pace of inventory accumulation, evidence suggests this adjustment is moving forward constructively. Largely in response to the stronger-thanexpected Chinese data out last month, we have marked up our global GDP outlook for 2011(%oya) to a modestly above-trend pace of 3% from 2.9% as of the last GMOS. Although the change is small, it is the first upward revision since late April and the momentum in positive data surprises has turned positive in the last four weeks after a midyear run of negative outturns. Consequently, along with our tiny upward revision to the growth outlook, the risk bias has shifted to the upside. The deceleration in global economic activity looks to have continued in the current quarter. After jumping 3.9% annualized in 2Q10, global GDP growth downshifted to a 2.7%pace last quarter and is projected to step further down to a2.3% pace this quarter. Some deceleration should not have been a surprise as the record surge in global manufacturing in the first year of the recovery came off the boil. However, the downshift was amplified by an unexpected slowing in consumer and business spending, coupled with deterioration in sentiment and risk appetites. Given the global nature of the step down in manufacturing output growth, the deceleration has been broad-based, with growth slowing across the developed and emerging markets.
Bruce Kasman (1-212) 834-5515
[email protected] JPMorgan Chase Bank NA
David Hensley (1-212) 834-5516
[email protected] JPMorgan Chase Bank NA
Joseph Lupton (1-212) 834-5735
[email protected] JPMorgan Chase Bank NA
Carlton Strong (1-212) 834-5612
[email protected] JPMorgan Chase Bank NA
Michael Mulhall (1-212) 834-9123
[email protected] JPMorgan Chase Bank NA
Nikolaos Panigirtzoglou (44-20) 7777-0386
[email protected] J.P. Morgan Securities Ltd.
Grace Koo (44-20) 7325-1362
[email protected] J.P. Morgan Securities Ltd.
John Normand (44-20) 7325-5222
[email protected] J.P. Morgan Securities Ltd.
Paul Meggyesi (44-20) 7859-6714
[email protected] J.P. Morgan Securities Ltd.
The forces behind the midyear slowdown—a policyinduced downshift in China, a sovereign debt crisis in Europe and a slide in consumer confidence and spending in the US—were broad-based and together posed a legitimate risk to an expansion still in its early stages. Also of concern was that these drags would be magnified by a sharper retrenchment in business spending. Another worry was of a negative feedback loop where slower growth fed weakness through a deterioration in financial conditions. In the event, firms appear to be bending modestly in the face of slower growth but continue to increase capital spending and hiring. Moreover, financial conditions remain a positive for growth, helped in part by the easing signals sent by central banks.
115
Ben Laidler (1-212) 622-5252
[email protected]
Latin America Equity Research November 2010
Economic Activity Surprise Index (EASI) Index
Inflation probability distribution for 2011 (developed) % , p ro b a b ility (b a s e d o n 1 9 2 p o s s ib le o u tc o m e s )
E u r o ar ea
30
5
15 0
0
-15 -30 -45 -60
-5
US
M ean
2007
2008
2009
2010
China provides the most concrete signs that drags are abating. The latest figures confirm that the most intense phase of the midyear inventory correction has passed and that growth bottomed in 2Q. A steady rebound is now under way, with domestic demand rising at a robust pace despite softness in the export sector. We expect economic activity in China to accelerate further in the coming quarters, fueled by ongoing strengthening in domestic demand. With monetary conditions still very easy and government infrastructure projects for next year to begin ramping up, the risk of overheating is now increasing. We have thus raised our estimate for China’s real GDP growth in coming quarters. Recent developments suggest the risks to our Euro area growth forecast are to the upside, with a shallower and shorter soft patch than the one currently in our projections. While the downward pressure on growth in the periphery remains intense, the extent of the spillover to the area wide economy looks to be more moderate than we have been anticipating. Indeed, German business surveys continue to impress. In the US, developments are less clear-cut, with consumer confidence still depressed and the impact of an imminent fiscal tightening uncertain. However, goods consumption rebounded smartly in the three months ending in September and the latest reading on October auto sales points to a further acceleration into the current quarter. In addition, an upturn in investment and hours worked remains intact. A key issue relates to the impact of the Fed’s recently announced quantitative easing package. While we are not building in significant growth benefits from these actions in our forecast, the Fed’s success in promoting more stimulative financial conditions helps limit downside risks as the economy continues to move forward at a modest pace. Perhaps the most important effect of the Fed’s actions will be its impact on confidence and asset prices.
= 1.1%
J . P . M o rg a n fc s t = 1 . 0 % P ro b (< ta rg e t)
-0 . 5 -0 . 0
Source: J.P. Morgan.
116
30 25 20 15 10 5 0 0 . 0 -0 . 5
-10
0 . 5 -1 . 0
1 . 0 -1 . 5
1 . 5 -2 . 0
2 . 0 -2 . 5
= 64%
2 . 5 -3 . 0
> 3.0
H e a d lin e in fla tio n (% 4 Q / 4 Q )
Source: J.P. Morgan.
The most recent readings from our J.P. Morgan global PMIs are adding some upside risk to the projected further slowing in growth in the current quarter. Based on the data in hand, the J.P. Morgan all-industry PMI (out tomorrow) appears to have jumped from 52.6 to just under 55, a large move that would be the first increase since peaking back in April and erase all of the decline since July. If the current level of the index holds through the end of the year, global GDP could expand at an annualized pace of 2.9%, over 1/2%-point stronger than our current forecast. More importantly, it is signalling that the midyear slowdown may have already bottomed as of the third quarter.
Deflation odds low, inflation odds also low Although economic activity appears set to accelerate into 2011, we are still only looking for trend-like growth in 1H11 and a move to above trend by 2H11. Consequently, the elevated levels of economic slack— primarily in the US, Euro area, Japan and UK—will remain in place well past 2011 and so too will the downward pressure on inflation. Despite a year of abovetrend growth in the first year of the recovery and a jump in commodity prices from their recession lows, core inflation rates in the developed markets (DM) have slid to the lowest level in over 50 years. In this regard, the historical record is clear: the level of economic slack matters more than its change. Since 1970, negative output gaps in every OECD country have been associated with declines in core inflation even in periods of above-trend growth. Phillips-curve-based model estimates suggest headline inflation will fall further next year in the developed markets, reaching just 0.1%oya by the end of 2011. By contrast, the J.P. Morgan forecast looks for headline inflation to remain near 1%oya.
Ben Laidler (1-212) 622-5252
[email protected]
Latin America Equity Research November 2010
The J.P. Morgan forecast rests on two key factors that should stabilize inflation next year. The first is that inflation expectations remain anchored near central bank targets. Improved monetary policy over the past two decades supports the view that expectations will remain anchored. With that said, the greater risk is that expectations will move down in line with the recent decline in core inflation. The second factor underlying the J.P. Morgan forecast is the considerable evidence that the transmission of slack to inflation is diminished at lower levels of inflation. Institutional as well as behavioral impediments create significant downward nominal rigidities in the price-setting process, thereby putting a floor under inflation.
The initial installment was modest in size, although officials have said they will expand it if necessary. We also look for the Bank of England to renew its bondbuying program by early next year, although, with inflation proving stickier at an elevated level, this is a much closer call. In sharp contrast to each of these central banks, the ECB has indicated it sees the potential costs of quantitative easing as outweighing any potential benefits. That said, none of these central banks is expected to begin raising rates until mid-2012 at the earliest. Note: This piece is excerpted from the issue of Global Markets Outlook and Strategy dated November 3, 2010.
In a recent report, we estimate that DM inflation will average 1.1%oya in 2011 across a wide range of possible behavioral and economic scenarios (“Stuck in a low inflation rut,” Global Issues, October 27, 2010). This result is in line with the J.P. Morgan forecast. Deflation for the DM as a whole is unlikely, with a probability of just 2%, but is somewhat more likely in the US. Although deflation risks appear low, our analysis shows that it will be difficult for central banks to raise inflation to a level with which they are comfortable. We estimate a two-thirds probability that inflation in the developed markets remains below central bank targets by the end of next year. Although the risk of a deflationary spiral appears low, this will be of limited comfort to central banks, who face a formidable challenge in returning inflation to a level with which they are comfortable. Large negative output gaps continue to exert a powerful downward pull on inflation. As an illustration, we estimate that GDP growth would need to reach about 5.5% in the US, 3.3% in the Euro area and 5.8% in Japan in 2011 to return inflation to target in the coming year. Moreover, these calculations assume stable inflation expectations, anchored at central bank targets. If inflation expectations move down in coming quarters, in line with past experience, growth will need to be even stronger. It is against this backdrop that the Fed has reopened the quantitative easing spigot today, roughly in line with market expectations. While the recent FOMC statement indicated inflation is only somewhat low, recognizing that the unemployment rate will remain elevated for some time suggests an admission of failure on both legs of its dual mandate. The BoJ has also already acted with the announcement of a wide-ranging new asset-purchase program.
117
Ben Laidler (1-212) 622-5252
[email protected]
Latin America Equity Research November 2010
Global Economic Outlook
Note: For some emerging economies, 2010-2011 quarterly forecasts are not available and/or seasonally adjusted GDP data are estimated by J.P. Morgan. Bold denotes changes from last edition of Global Markets Outlook and Strategy published November 3, 2010, with arrows showing the direction of changes. Underline indicates beginning of J.P. Morgan forecasts. Source: J.P. Morgan estimates.
118
Ben Laidler (1-212) 622-5252
[email protected]
Latin America Equity Research November 2010
Central Bank Watch Change from Official interest rate Global
Current Aug '07 (bp)
Forecast Last change
Next meeting
next change
Dec 10 Mar 11 Jun 11 Sep 11 Dec 11
GDP-weighted average
1.79
-316
1.80
1.85
1.92
1.96
2.05
excluding US GDP-weighted average
2.44
-237
2.45
2.52
2.61
2.67
2.80
Developed
GDP-weighted average
0.61
-358
0.62
0.63
0.65
0.68
0.72
Emerging
GDP-weighted average
5.09
-201
5.11
5.26
5.47
5.56
5.79
Latin America GDP-weighted average
7.24
-217
7.27
7.74
8.33
8.39
8.40
CEEMEA
GDP-weighted average
4.08
-294
4.05
4.07
4.13
4.32
4.80
EM Asia
GDP-weighted average
4.71
-154
4.75
4.82
4.97
5.02
5.22
The Americas
GDP-weighted average
1.28
-453
United States
Federal funds rate
0.125
-512.5
16 Dec 08 (-87.5bp)
14 Dec 10
On hold
1.29
1.38
1.49
1.51
1.55
0.125
0.125
0.125
0.125
0.125
Canada
Overnight funding rate
1.00
-325
8 Sep 10 (+25bp)
7 Dec 10
1 Mar 11 (+25bp)
1.00
1.25
1.50
1.75
2.25
Brazil
SELIC overnight rate
10.75
-125
21 Jul 10 (+50bp)
8 Dec 10
Mar 11 (+25bp)
10.75
11.50
12.50
12.50
12.50
Mexico
Repo rate
4.50
-270
17 Jul 09 (-25bp)
26 Nov 10
On hold
4.50
4.50
4.50
4.50
4.50
Chile
Discount rate
2.75
-225
16 Sep 10 (+50bp)
16 Nov 10
16 Nov 10 (+25bp)
3.25
4.00
4.25
4.25
4.25
Colombia
Repo rate
3.00
-600
30 Apr 10 (-50bp)
19 Nov 10
1Q 11 (+50bp)
3.00
4.00
5.00
5.50
5.50
Peru
Reference rate
3.00
-150
9 Sep 10 (+50bp)
11 Nov 10
May 11 (+25bp)
3.00
3.00
3.50
4.25
4.50
Europe/Africa
GDP-weighted average
1.45
-322
1.45
1.45
1.46
1.51
1.62
Euro area
Refi rate
1.00
-300
7 May 09 (-25bp)
4 Nov 10
On hold
1.00
1.00
1.00
1.00
1.00
United Kingdom Repo rate
0.50
-500
5 Mar 09 (-50bp)
4 Nov 10
On hold
0.50
0.50
0.50
0.50
0.50
Sweden
1.00
-250
26 Oct 10 (+25bp)
15 Dec 10
15 Dec 10 (+25bp)
1.25
1.25
1.25
1.50
2.00
Repo rate
Norway
Deposit rate
2.00
-250
5 May 10 (+25bp)
15 Dec 10
3Q 11 (+25bp)
2.00
2.00
2.00
2.25
2.75
Switzerland
3-month Swiss Libor
0.25
-225
12 Mar 09 (-25bp)
4Q 10
Jun 11 (+25bp)
0.25
0.25
0.50
0.75
1.00
Czech Republic 2-week repo rate
0.75
-200
6 May 10 (-25bp)
4 Nov 10
2Q 11 (+25bp)
0.75
0.75
1.00
1.25
1.75
Hungary
2-week deposit rate
5.25
-250
26 Apr 10 (-25bp)
29 Nov 10
3Q 11 (+25bp)
5.25
5.25
5.25
5.50
5.75
Israel
Base rate
2.00
-200
27 Sep 10 (+25bp)
22 Nov 10
22 Nov 10 (+25bp)
2.25
2.50
2.75
3.25
3.50
Poland
7-day intervention rate
3.50
-100
24 Jun 09 (-25bp)
23 Nov 10
2Q 11 (+25bp)
3.50
3.50
3.75
4.00
4.25
Romania
Base rate
6.25
-75
4 May 10 (-25bp)
5 Jan 11
3Q 11 (+25bp)
6.25
6.25
6.25
6.50
6.75
Russia
1-week deposit rate
2.75
-25
31 May 10 (-50bp)
Nov 10
3Q 11 (+25bp)
2.75
2.75
2.75
3.00
3.50
South Africa
Repo rate
6.00
-350
9 Sep 10 (-50bp)
18 Nov 10
18 Nov 10 (-50bp)
5.50
5.50
5.50
5.50
5.50
Turkey
1-week repo rate
7.00
-1050
-
11 Nov 10
4Q 11 (+50bp)
7.00
7.00
7.00
7.00
8.00
Asia/Pacific
GDP-weighted average
3.01
-119
3.03
3.09
3.19
3.24
3.37
Australia
Cash rate
4.75
-150
2 Nov 10 (+25bp)
6 Dec 10
1Q 11 (+25bp)
4.75
5.00
5.25
5.50
5.75 4.00
New Zealand
Cash rate
3.00
-500
29 Jul 10 (+25bp)
8 Dec 10
10 Mar 11 (+25bp)
3.00
3.25
3.50
3.75
Japan
Overnight call rate
0.05
-48
5 Oct 10 (-5bp)
5 Nov 10
On hold
0.05
0.05
0.05
0.05
0.05
Hong Kong
Discount window base
0.50
-625
17 Dec 08 (-100bp)
4 Nov 10
On hold
0.50
0.50
0.50
0.50
0.50
China
1-year working capital
5.56
-101
19 Oct 10 (+25bp)
1Q 11
2Q 11 (+25bp)
5.56
5.56
5.81
5.81
6.06
Korea
Base rate
2.25
-225
9 Jul 10 (+25bp)
15 Nov 10
4Q 10 (+25bp)
2.50
2.75
2.75
2.75
3.00
Indonesia
BI rate
6.50
-200
5 Aug 09 (-25bp)
4 Nov 10
2Q 11 (+25bp)
6.50
6.50
6.75
6.75
6.75
India
Repo rate
6.25
-150
2 Nov 10 (+25bp)
16 Dec 10
1Q 11 (+25bp)
6.25
6.50
6.50
6.75
7.00
Malaysia
Overnight policy rate
2.75
-75
8 Jul 10 (+25bp)
12 Nov 10
On hold
2.75
2.75
2.75
2.75
2.75
Philippines
Reverse repo rate
4.00
-350
9 Jul 09 (-25bp)
18 Nov 10
2Q 11 (+25bp)
4.00
4.00
4.25
4.50
4.50
Thailand
1-day repo rate
1.75
-150
26 Aug 10 (+25bp)
1 Dec 10
1 Dec 10 (+25bp)
2.00
2.00
2.00
2.00
2.00
Taiwan
Official discount rate
1.500
-163
30 Sep 10 (+12.5bp) 23 Dec 10
3Q 11 (+12.5bp)
1.50
1.50
1.50
1.625
1.75
Bold denotes move since last GMOS and forecast changes. Source: J.P. Morgan.
119
Ben Laidler (1-212) 622-5252
[email protected]
Latin America Equity Research November 2010
Capital Controls and FX Intervention State of current FX regime, capital controls and possible future Intervention measures in Emerging Markets China India
Indonesia Korea Malaysia Philippines Singapore Sri Lanka Taiwan
Thailand
Argentina Brazil Chile Colombia Mexico Peru Czech Hungary Israel Poland Russia South Africa Turkey
FX regime
Recent measures
Possible future measures
Closed Capital Account. Bond Investment only possible through QFI, but discouraged by authorities Strict Limits on size of foreign bond investment. Limit of $5bn on government bonds and $15 bn on corporates
None
None
In September, SEBI announced the Potential for currency intervention, but we expect no action against bonds. increases in the FII Limits to $10bn for government bonds and $20bn for corporates Interest and an income tax at 20%, but majority of investors use tax 1-month minimum holding period for Further restrictions on SBIs; Tax treaties to reduce these taxes between 0-10% foreigners investing in SBIs increases are unlikely as it needs parliamentary approval Withholding tax was made exempt on MSB and KTB since May In June, caps on foreign banks FX forward Possibly reimposing WHT on MSBs and 2009 positions were announced leading to less KTBs. Further lowering of cap on foreign banks FX fwd positions. MSB holdings. No taxes None None Income tax of 20% on interest income and capital gains. None None Open capital account. No taxes. None None None Easing of capital controls. Strict Limits on size of foreign investment in T-bonds and T-bills at 10% of total outstanding. Investment in corporate bonds is not permitted. None Time deposits are not allowed for foreigners. FINI account required Verbally discourage fixed income for foreign investment, frequest inspections of custodian banks investment by FINI accounts, propose mandatory use of USD for foreigners equity margin accounts. Foreigners exempt from WH tax for government bonds 15% WHT was reintroduced to equalize Potential introduction of across the board tax on all fixed income inflows with with current tax regime for domestic potential restrictions on minimum holding holders. period. Non Convertible and capital outflow controls remain in place with a None None minimum holding period of 1year and US$2mm outflow per month Risks remain high for further Non Convertible. Tax of 6% on foreign fixed income investment and Increase IOF Tax on fixed income interventions. 2% on equity investment. Increase margin for derivative transactions investment to 4% on Oct 4th and to 6% on Oct 18 Non Convertible. No capital controls None Near-term risks are limited although an increase in FX intervention is possible if CLP rallies further USD purchases of $20mm day Risks remain high for further interventions Non Convertible. 33% tax on income and capital gains and 6% WHT both in spot FX and potentially increases on coupon payments for bonds with maturities up to 5 years and 4% in Reserve for longer bonds. Free floating and deliverable. No FX controls. Banxico sells $600mm None None of USDMXN puts per month. Reinstated 4% fee on Bank CDs Unlikely to initiate new tax measures but Non Convertible. Reserve Requirements on foreign deposits purchases of USD have been high this (120%), 30% tax on interest paid to non-residents. Limits on pension year at $8bn YTD. fund short USD positions Free floating and convertible None None Free floating and convertible. It is important to note the heavy None None indebtedness of the private sector in foreign currency debt. None None Free floating and convertible. Interventions in the fx market have been substantial and we estimate have been running at a $700mm per month pace. Free floating and convertible. None None Managed float vs a basket of EUR and USD (45%/55%). Current Recently widened the band Moving toward more currency flexibility band of the basket is between 32.90 and 36.90 Freely convertible. SARB does intervene on occasion. No capital None Risk of more aggressive intervention controls Risk of aggressive and unorthodox Freely floating and convertible. CBRT engages in daily FX auctions Lowered the interest rate on foreign intervention is low, but policy of building of $40mm USD and sets a weekly guidance of an extra amount. currency deposit rates to 0.25% from reserves remains in place. 2.50%. Increased weekly auction amounts to $500mm most recently.
Source: J.P. Morgan, “Get over It: EM FX Appreciation and Interventions Are Here to Stay,” Sclater -Booth et al, 21 Oct 10.
120
Ben Laidler (1-212) 622-5252
[email protected]
Latin America Equity Research November 2010
Foreign exchange reserve appreciation (YTD) 23.6
17.7
USD Bn
16.9
15.5
15.3
15.0 12.2
% change
25 20
12.2 8.5
9.4
6.8
15
6.4
6.1
5.3
5.2
4.1
10
3.7 0.1
5
-1.7
-5 Malaysia
South Africa
India
Chile
Argentina
Czech
Colombia
Peru
Korea
Taiwan
China
Turkey
Russia
Thailand
Poland
Brazil
Mexico
Philippines
0 Indonesia
70 60 50 40 30 20 10 0 -10
Source: Bloomberg.
FX appreciation vs. US$ (YTD %) 15
12.1
11.0
10.9 8.6
10
7.0
6.5
6.3
5.6
5.4
5.2
4.9
4.8
5
3.9
3.4
2.8
2.2
2.1
-2.5
-4.0
Argentina
Russia
Poland
China
Brazil
Peru
Chile
Korea
India
Taiwan
Indonesia
Turkey
Mexico
South Africa
Philippines
Colombia
Malaysia
Thailand
-5
Czech
0
Source: Bloomberg.
10-year government bond yields (%)
8.3
7.8 5.2
5.2
7.1 5.1
7.0
4.1
6.0
5.6 4.0
3.7
3.7
5.4
5.4 3.5
3.1
4.5 2.9
5.3 2.7
3.9 2.4
3.6 2.4
3.5 2.2
Czech
Russia
Korea
Peru
Philippines
Mexico
Poland
Colombia
Indonesia
Turkey
SA
India
Brazil
2 0
3.1 1.4 1.3 0.9 Taiwan
8.0
Thailand
6.5
After-tax
China
10 8 6 4
Pre-tax
11.9
Malaysia
14 12
Source: Bloomberg, J.P. Morgan calculations. Note: After-tax assumes US institutional investor tax treatment.
121
Ben Laidler (1-212) 622-5252
[email protected]
Latin America Equity Research November 2010
Brazil Economics Inflation risks on the rise Despite the slowdown observed in the central quarters of the year, the economic activity scenario remains very robust, especially due to the domestic demand drivers. The labor market is extremely tight, with the unemployment rate at a historical low and real wage gains accelerating at a worrisome pace. On top of that, credit conditions continued to improve despite the 200bp monetary tightening implemented between April and September. Against this backdrop of strong domestic demand expansion, we believe Brazil’s growth rate will reaccelerate by the end of this year and will begin 2011 on a strong footing. The resumption of growth in an environment of already tight utilization rates will put even more pressure on headline and core inflation, which are already running above the BCB target of 4.5%. Will Rousseff rebalance Brazil’s policy mix? The economic policy mix in the last year of the Lula Administration has been clearly unbalanced, with the expansionary fiscal policy putting upward pressure on interest rates, and the high yields of local rates market attracting short-term capital inflows. The problem is that the government has responded to the resulting fx appreciation pressures with the imposition of new taxation on foreign capital inflows instead of promoting a fiscal adjustment aimed at reducing aggregate demand. We expect that the next administration will promote some fiscal correction, but the resumption of a monetary tightening is inevitable, in our view. Our forecast is that the Selic rate will be increased by 175bp next year, to 12.50%. Assuming some policy action will be taken by the next administration, we anticipate growth will moderate to 4.5% next year (from 7.5% in 2010), which will help to reduce inflation from 5.6% this year to a still-above-target 5.1% in 2011. All eyes on cabinet formation The market expects a market-friendly cabinet, with exFinance Minister Palocci likely setting the agenda from the Chief of Staff’s chair. BCB Governor Meirelles is seen as an invaluable asset and should be retained, either remaining at the BCB or being appointed to a more political position. If Meirelles leaves the BCB, an appointment from within is likely. For the finance portfolio, Guido Mantega and Luciano Coutinho are the leading contenders, in our view.
Fabio Akira
AC
(55-11) 3048-3634
[email protected] Banco J.P. Morgan S.A.
High utilization of labor and capital resources % of full capacity, sa
% of labor force, sa, inverted
88
6 FGV operating rates
86
8
84 82
10
80
Unemployment rates
76
03
05
07
14
09
IPCA headline and core inflation %oya, nsa 7
Headline
6 Core
5 4 3
2006
2007
2008
2009
2010
Brazil: economic indicators Average 2003-07
2008
2009
2010f
2011f
Real GDP, % change Consumption* Investment* Net trade* Consumer prices, %oya % Dec/Dec Producer prices, %oya Government balance, % of GDP
4.0 2.7 1.2 0.0 7.1 6.0 9.6 -3.3
5.1 4.5 2.7 -2.0 5.7 5.9 13.7 -1.9
-0.2 3.1 -3.4 0.1 4.9 4.3 -0.2 -3.3
7.5 6.1 4.5 -3.1 5.0 5.6 4.5 -3.4
4.5 4.3 1.7 -1.6 5.6 5.1 3.1 -2.5
Exchange rate, units/$, eop Merchandise trade balance ($ bil.) Exports Imports Current account balance % of GDP
2.36 37.9 117.3 79.3 9.4 1.0
2.31 24.9 198.7 173.8 -29.2 -1.8
1.74 25.0 153.5 128.5 -25.2 -1.6
1.70 13.7 196.7 183.0 -49.3 -2.4
1.85 -0.6 221.0 221.6 -68.3 -3.1
International reserves, ($ bil.) Total external debt, ($ bil.) Short term† Total external debt, % of GDP Total external debt, % of exports‡ Interest payments, % of exports‡
83.8 229.9 32.7 25 157 11
192.8 306.4 38.8 18 124 7
236.8 301.2 30.8 19 160 9
292.3 335.2 29.8 16 137 7
300.3 352.2 29.8 16 131 6
* Contribution to growth of GDP. † Debt with original maturity of less than one year. ‡ Exports of goods, services, and net transfers.
Source: BCB and J.P. Morgan.
122
12
78
Ben Laidler (1-212) 622-5252
[email protected]
Latin America Equity Research November 2010
Mexico Economics ƒ
External demand might curb growth, but auto sector and credit could boost domestic demand
ƒ
Unfortunately, gubernatorial elections will likely create a political impasse for structural reforms
ƒ
Sluggish growth and well-behaved inflation will keep Banxico on hold all year long
ƒ
Favor long MXN over front-end receivers in TIIE swaps
Fundamentals and politics in 2011 Structural change in the auto sector and credit growth could overcompensate sluggish US growth The externally driven manufacturing production has led Mexico’s economic recovery throughout the year. Nevertheless, growing concerns about longer-term sluggish growth in the US is posing risks ahead. In this context, we believe Mexico’s GDP will grow 3.5% in 2011 (consensus: 3.5%). We could even see lower growth rates in Mexico. Nevertheless, it is our take that the structural change that the auto sector has experienced in the Mexican economy and credit growth in Mexico will help to overcompensate US growth’s sluggishness. On the one hand, several automakers across the world have reallocated part of their production to Mexico to benefit from a weaker peso, skilled Mexican labor, stillhigh transport costs, and the country’s strategic geographic location. On the other hand, commercial banks’ credit might post significantly high growth rates in 2011. The Mexican banking system is composed of 41 well-capitalized commercial banks. The average capitalization index stands at 17.7, with a range of 12.3 to early 240. Unfortunately, total commercial bank credit to the private sector represents less than 15% of GDP. After the credit boom in Mexico in 2004-2006, nonperforming loans increased significantly, making banks rethink their credit-giving policies. Nevertheless, commercial banks have now “cleaned up” their credit balances and employment conditions have improved significantly in the past 12 months. As a result, we believe that it is highly likely that all these factors will probably lead to an ascending trend in the country’s domestic credit cycle.
Gabriel CasillasAC (52-55) 5540-9558,
[email protected] Banco J.P. Morgan S.A., Institución de Banca Múltiple J.P.Morgan Grupo Financiero
Gubernatorial elections will likely create a political impasse for structural reforms There is no doubt that Mexico needs several structural reforms, particularly meaningful fiscal and labor-market reforms as well as new guidelines to empower antitrust officials to dilute monopolies and foster competitiveness. We strongly believe that the lack of these structural reforms is restraining domestic demand and Mexico’s potential GDP. Furthermore, the prevailing legal uncertainty with regard to enforcing contracts is shortcircuiting the credit intermediation function of commercial banks. Unfortunately, the seemingly large GDP growth rates that the country has observed in 2010 appear to be providing a “false sense of security” to government officials, particularly legislators, who have now downplayed the need for reforms in Mexico. Furthermore, with gubernatorial elections in six states next year, particularly in the highly populated State of Mexico, it is going to be difficult to secure congressional approval for the key reforms that the country needs. Not all long-term plans are negative. We believe infrastructure projects, including construction of roads, water treatment plants, and massive transportation systems, will play an important role in the next two years. This is mainly because several projects that had been in a feasibility study phase over the past two years are now ready to start construction. Furthermore, several projects suffered important delays because of the global financial crisis. However, state-owned development bank BANOBRAS has modified its lending framework to provide guarantees in addition to funding and is now working with the National Infrastructure Fund to also provide direct, nonrefundable funds to projects with a high social return. Banxico to keep rates on hold throughout the year The growth backdrop we have sketched above, in addition to well-anchored medium-term inflation expectations and moderate wage increases, clearly support our “low-for-long” monetary policy call, in which we anticipate that the first hike will not take place until 2Q12 (consensus: 1Q12).
Market strategy We favor long MXN over receivers in the front end of the TIIE swap curve. 123
Ben Laidler (1-212) 622-5252
[email protected]
Latin America Equity Research November 2010
China Economics Growth momentum in China’s economy improved moderately in 3Q10, with real GDP rising 8.1%q/q saar by our calculation, exceeding our forecast of 7.5% and following a 7.2%q/q saar expansion in 2Q. The latest macro figures confirm our view that growth bottomed in 2Q and has been on a steady rebound since, with domestic demand rising at a solid pace despite softness in the export sector and with the most intense phase of inventory correction gradually fading. We expect growth in China to pick up steadily in coming quarters, with further solid expansion in domestic demand in particular. Local governments are anticipated to gear up for the start of new projects going into 2011. This, along with the central government’s efforts to meet the 5.8-million-unit housing target, solid private consumption and investment demand, the gradual fading of the inventory drag, and largely accommodative monetary conditions, could increase the risk of overheating by early next year. We have moderately increased our estimate for China’s real GDP growth in coming quarters. Our forecast for 2010 full-year GDP growth has been fine-tuned to 10.0%oya (previously: 9.8%), while our estimate for 2011 GDP growth is now 9.0%oya (previously: 8.6%). We have also revised the forecast for 2010 average CPI inflation rate to 2.9%oya (previous forecast: 2.8%). The forecast for 2011 average CPI inflation now stands at 3.2%oya, taking into account the impact of potential further resource and energy price liberalization. Indeed, we believe the PBoC’s 25bp rate hike effective on October 20th is intended to signal that the central bank is keen to contain inflation expectations. As such, we expect headline CPI inflation to peak in coming months, with the inflation rate gradually stabilizing at around 3.2% by early next year. Our US team is looking for the Fed to maintain its fed funds target rate through to 2Q12, and to begin QE2 in early November. So these factors imply the PBoC would be somewhat constrained should it want to undertake further rate hikes. We now expect the PBoC to be on hold in coming months as it monitors the impact of tightening measures on the property sector. We expect the next rate hike to come in 2Q11, and we look for a total of two rate hikes next year. For the property sector, we believe the authorities will continue to focus on sector-specific measures, targeting both the demand and the supply sides, in an effort to contain further rises in property prices.
124
Qian Wang (852) 2800 7009,
[email protected]
Grace Ng (852) 2800 7002,
[email protected]
Lu Jiang (852) 2800 7053,
[email protected] JP Morgan Chase Bank, N.A., Hong Kong
China: real GDP growth %oya
%q/q, saar
%q/q, saar
16
20
%oya
14
15
12 10 10 5
8 6
00
02
04
06
08
10
0
Source: CEIC and J.P. Morgan estimates.
China: headline CPI, food prices, and nonfood CPI inflation %oya, both scales 10 8 6 4 2 0 -2 -4 2002
CPI
CPI: food prices
25 20
Nonfood CPI
15 10 5 0 -5 2003
2004
2005
Source: CEIC and J.P. Morgan estimates.
2006
2007
2008
2009
2010
Ben Laidler (1-212) 622-5252
[email protected]
Latin America Equity Research November 2010
Meanwhile, CNY/USD appreciation has accelerated in recent weeks, and the trend could continue post the US midterm elections and G-20 summit in November. The probability of more significant near-term CNY/USD appreciation could yet be capped by Chinese policymakers’ fears over ongoing uncertain external demand and its impact on exports, and if the spot rate begins to show more two-way volatility when political pressure starts to ease later this year. Our forecast is for the CNY/USD rate to be unchanged at 6.6 at year-end, with the bilateral rate expected to appreciate steadily toward 6.3 by end-2011.
China: benchmark lending and deposit rates % per annum
J.P. Morgan forecasts
8 7
1-year lending rate
6 5 4
1-year deposit rate
3 2 1
04
05
06
07
08
09
10
11
Source: CEIC and J.P. Morgan estimates.
On the fiscal front, we expect the focus to shift from infrastructure investment toward consumption and achieving more balanced growth. In addition to structural reforms and the gradual buildup of social security, urbanization and infrastructure spending will likely remain a key focus in the 12th five-year plan. Therefore, solid public investment and steadily strengthening private consumption should ensure that the economy expands at a solid 8% pace over the next five years, despite soft global demand. This, together with the government’s commitment to increase the supply of housing, suggests that commodity demand from China will remain solid in coming years. However, the government’s firm resolve to conserve energy and slower the pace of private investment growth, given the softer global demand and abundant capacity in many manufacturing sectors, suggests that the booming pace of China’s commodity demand growth during the past decade is unlikely to be repeated.
125
Ben Laidler (1-212) 622-5252
[email protected]
Latin America Equity Research November 2010
China Infrastructure
Qian Wang
Target railway capex for 2010 and 2011 As per the Ministry of Railway’s (MOR) plan announced in July 2009, the total railway spending target for 2010 and 2011 is Rmb825 billion and Rmb900 billion respectively. The target capex on civil works, which accounts for c.85% of the total railway capex, is Rmb700 billion for 2010 and Rmb750 billion for 2011. This implies that spending on civil works is estimated to increase by 17% in 2010 and 7% in 2011. This is significantly lower than the average growth rate of 64% in the last four years.
Grace Ng
(852) 2800 7009,
[email protected] (852) 2800 7002,
[email protected]
Lu Jiang (852) 2800 7053,
[email protected] JP Morgan Chase Bank, N.A., Hong Kong
Target railway length Based on the latest version of the MOR’s medium- to long-term railway development plan (announced in 2008), China plans to achieve a total ending length of 120,000km by 2020. During late 2008 and early 2009, in response to the financial crisis outside China, the MOR fast-tracked a number of projects on back of the government’s aggressive fiscal stimulus. With this year’s ending length at approximately 90,000km, our regional infrastructure team expects China to achieve a total railway length of 110,000km by 2012. The MOR’s existing medium-term target of 120,000km of railway network by 2020 can be achieved as early as 2015.
Strong railway spend so far Railway capex is up 27% yoy in 9M2010. The MOR’s railway spending amounted to Rmb491 billion in the first nine months, achieving 60% of the full-year target of Rmb825 billion, ahead of last year’s ratio of 55% over the same nine-month period. Within this, a total of Rmb430 billion was spent on civil works, forming 88% of the railway spending and achieving 61% of the fullyear target, ahead of last year’s 57%. For the final quarter of the year, the pace of increase is expected to soften markedly to a meager 3% yoy, assuming the MOR’s target is kept unchanged. It is likely that the current target may be exceeded if the current momentum is maintained.
Expectations from the 12th Five-Year Plan While the 12th Five-Year plan has not yet been officially announced, our regional infrastructure team believes that there is a high likelihood of upward revisions to railway infrastructure spending and increases in the MOR’s medium-term railway operating length target. The government has emphasized on several occasions that improving transportation links, particularly the railway network, is vital to rebalancing economic growth across regions.
China infrastructure spending outlook Spending (Rmb B) Capex on total railway spending Capex on civil works Capex on locomotives and others % capex on civil works % capex on locomotives and others Y/Y growth (capex on civil works) Y/Y growth (capex on locomotives) Ending railway length (km) MOR’s railway spending during the year Highway/Tollroads (Rmb B) Source: MOR, J.P. Morgan estimates.
126
2005 120 89 31 74 26
2006 208 155 52 75 25 75 68
2007 255 177 78 69 31 14 49
2008 414 337 77 81 19 90 (1)
2009 701 600 101 86 14 78 31
2010E 825 700 125 85 15 17 23
2011E 900 750 150 83 17 7 20
2012E 880 700 180 80 20 (7) 20
75,438 89
76,919 155
77,904 177
79,625 337
86,500 600
90,000 700
93,500 750
108,000 700
649
688
967
1160
1276
na
Ben Laidler (1-212) 622-5252
[email protected]
Latin America Equity Research November 2010
Western-China-driven growth
Real GDP growth – Western China lagged until 2008 15
Western China Western China includes six provinces (Gansu, Guizhou, Qinghai, Shaanxi, Sichuan, and Yunnan), five autonomous regions (Guangxi, Inner Mongolia, Ningxia, Tibet, and Xinjiang), and one municipality (Chongqing). The major cities (with a population over 5 million) are Chengdu, Chongqing, Xi'an, Kunming, Wulumuqi. Land area and population Western China accounts for 71% of mainland China’s area. Its population as of 2009 was 370 million, or 27.5% of China’s total population. GDP growth From 2000 to 2008, Western China’s GDP growth consistently lagged that of the non-western regions (see table top right). As a result, Western China’s share of China’s real GDP experienced a steady decline during the period (see figure top right). In 2007, Western China accounted for 15.9% of China’s real GDP growth, lower than its share in 2000 (16.3%). However, in 2009 the trend reversed, with Western China’s GDP growing at 12.4%, higher than the non-western region’s at 11.5%. The two main reasons for this were: a) With its greater reliance on China’s exports, the impact of the global recession in 2008 was more severe on Eastern China; and b) Western China benefited from China’s massive infrastructure spending in 2009, as significant resources were allocated to the western region, which has poor infrastructure facilities. Per-capita GDP There is significant scope for economic development in Western China compared to the more developed coastal regions. 2009 average per capita GDP in the 12 western provinces was Rmb17,595. This is less than half of the per capita GDP of Rmb42,469 in the coastal provinces. The average per capita urban income for the 12 western provinces was Rmb13,896. This is only 70% of the average in coastal provinces (Rmb19,766).
14
Non-w estern region
13 12
Western region
11 10 9 8 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 Source: CEIC, J. P. Morgan Economics.
Western China’s real GDP as % of national real GDP 16.4
16.2
16.0
15.8 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 Source: CEIC, J. P. Morgan Economics.
GDP per capita – Western vs. coastal provinces (Rmb/yr) Coastal
45,000 40,000 35,000 30,000 25,000 20,000 15,000 10,000 5,000 99
00
01
02
03
04
Western
05
06
07
08
09
Source: CEIC, J. P. Morgan Economics.
127
Ben Laidler (1-212) 622-5252
[email protected]
Latin America Equity Research November 2010
Policy initiatives and projects announced in 2010 In 2000, Beijing adopted the ‘Go West’ policy to develop its relatively isolated and underdeveloped Western China region. The main components of the policy included infrastructure development, attracting foreign investment, improving ecological protection, promoting education, and retaining high-skilled labor from moving to richer provinces. From 2000 to 2009, China launched 120 projects with a total cost of Rmb2.2 trillion (source: Reuters). In 2010, the following projects and preferential policies were announced to further improve the development of the western region: 1. The National Development Reform and Commission (NDRC) announced on 6 July that China will embark on 23 new projects in the west region this year totaling Rmb682 billion (US$100 billion). These projects range from railway, airports, power grids, power stations, wind powers to coal mines.
128
2. China’s State Council announced on 7 July that the new resource tax, which was levied in Xinjiang as of 1 June 2010, and is charged at 5% of the revenue of coal, oil and gas companies, should be extended to all 12 provinces in Western China. The resource tax reform will help the local governments in Western China to collect taxation revenue to develop the local economy and gradually bridge the gap between developed coastal regions and the less developed western regions. 3. The state council confirmed that the encouraged industries in Western China will be entitled to 15% preferential income tax rate for another 10 years. In comparison, the income tax rate of Chinese enterprises in other regions will be unified to 25%. This measure should help boost Western China’s medium-term growth by attracting more factories/companies and creating more job opportunities.
Ben Laidler (1-212) 622-5252
[email protected]
Latin America Equity Research November 2010
Chinese car sales (%yoy)
Chinese retail sales (%yoy)
120 100
25
80
20
60 40
15
20
10
0 -20
5
-40
0 Jan-99 Jul-00 Jan-02 Jul-03 Jan-05 Jul-06 Jan-08 Jul-09 Source: J.P. Morgan Economics.
01
02
03
04
05
06
07
08
09
10
Source: J.P. Morgan Economics, September 2010.
Wage growth (%yoy)
Consumer loan increase as a % of total loan increase
22
15%
20
12%
18
9%
16 14
6%
12
3%
10
Jan-09 Feb-09 Mar-09 Apr-09 May-09 Jun-09 Jul-09 Aug-09 Sep-09 Oct-09 Nov-09 Dec-09 Jan-10 Feb-10 Mar-10 Apr-10 May-10 Jun-10 Jul-10 Aug-10
0%
Source: J.P. Morgan Economics.
Source: CEIC, J. P. Morgan.
Minimum wage increases in several provinces and municipalities in 2010 Provinces/ Municipals Shanghai Zhejiang Guangdong Beijing Jiangsu Tianjin Shandong Fujian Hubei Shanxi Jilin Ningxia
Minimum monthly wage (RMB) Before After 960 1,120 960 1,100 860 1,030 800 960 850 960 820 920 760 920 720 900 700 900 736 850 650 820 560 710
8 1Q01 1Q02 1Q03 1Q04 1Q05 1Q06 1Q07 1Q08 1Q09 1Q10
Recent minimum wage increase (%) 17% 15% 20% 20% 13% 12% 21% 25% 29% 16% 26% 27%
Adjustment effective date 1-Apr-10 1-Apr-10 1-May-10 1-Jul-10 1-Feb-10 1-Apr-10 1-May-10 1-Mar-10 1-May-10 1-Apr-10 1-May-10 1-May-10
% of households grouped by annual income as of 2008 Annual income <RMB10000 RMB10000-20000 RMB20000-30000 RMB30000-40000 RMB40000-50000 RMB50000-60000 RMB60000-70000 RMB70000-80000 RMB80000-90000 RMB90000-100000 >RMB100000
% of households 1.5 9.9 17.7 18.3 15.0 10.8 7.8 5.3 3.7 2.6 7.5
Source: CEIC.
Source: finance.sina, Bloomberg news. Note: Except Shanghai and Beijing, all districts in the table have multiple tiers of minimum wages. The minimum wages and increase % shown for those districts are of the highest tier.
129
Ben Laidler (1-212) 622-5252
[email protected]
Latin America Equity Research November 2010
China FAI: Do not extrapolate Can housing starts continue to grow in 2011 or will there be an inventory correction? Residential construction (advanced 12 months) versus sales (millions of square meters GFA per month)
160 140
Note: Increases in affordable housing construction starts 167M sq m of GFA in 2011 – just six weeks of private construction starts (J.P. Morgan estimates, see China affordable housing, Kwong et al, 27 October 2010).
120 100 80 60 40 20 0 Jan-06
Jul-06
Jan-07
Jul-07
Jan-08
Jul-08
Jan-09
Jul-09
Estimated total monthly residential construction starts
Jan-10
Jul-10
Jan-11
Jul-11
Monthly residential sales
Source: CEIC, J.P. Morgan calculations. Notes: Monthly total construction data is available in China. The ratio from 2005 to 2010 of residential construction to total construction is 80%. This ratio is used to estimate the residential starts from the monthly total construction starts. The monthly total constructions starts and monthly residential sales data are seasonally adjusted.
Per capita consumption of cement (tonnes) vs. adjusted per capita nominal GDP Russia (1991-2009E)
Cement consumption per capita (tonnes)
1997: per capita cement consumption peaked in Korea
1.4
India (1985-2009E)
China 2010 E 1993: per capita cement consumption peaked in Taiwan
China (1985-2010E) US (1930-2008) UK (1985-2009E)
China 2009
1.2
Brazil (1985-2009E)
Germany (1985-2009E) Japan (1985-2009E) Taiwan (1985-2009)
1.0
South Korea (1985-2009E) Mexico (1985-2009E)
S. Korea 2009E 0.8
Japan 2009E
0.6 Russia 2009E
Germany 2009E
Taiwan 2009
Mexico 2009E
0.4
0.2 Brazil 2009E
US 2008 UK 2009E
India 2009E 0.0 0
6000
12000
18000
24000
30000
36000
GDP per capita (USD)
Source: US Geological Survey and J.P. Morgan estimates. Note: The GDP per capita is restated for today's dollars by adjusting the deflator series.
130
42000
48000
Ben Laidler (1-212) 622-5252
[email protected]
Latin America Equity Research November 2010
Market Forecasts
Source: Bloomberg, Datastream, IBES, Standard & Poor’s Services, J.P. Morgan estimates.
131
Ben Laidler (1-212) 622-5252
[email protected]
Latin America Equity Research November 2010
J.P. Morgan FX Forecasts vs. Forwards & Consensus Exchange rates vs. U.S dollar JPM forecast gain/loss vs Dec-11*
Actual change in local FX vs USD
Oct 1
Dec 10
Mar 11
Jun 11
Sep 11
Dec 11
forward rate
Consensus**
Past 1mo
YTD
Past 12mos
EUR
1.37
1.30
1.30
1.30
1.30
1.25
-8.5%
-0.7%
7.3%
-4.2%
-5.8%
JPY
83.3
79
81
83
85
88
-6.1%
3.8%
1.4%
11.9%
7.9%
GBP
1.58
1.49
1.48
1.48
1.49
1.47
-6.7%
-5.5%
2.4%
-2.0%
-0.8%
AUD
0.97
0.93
0.95
0.99
1.01
0.98
6.9%
12.1%
7.1%
8.3%
12.4%
CAD
1.03
1.03
1.02
0.99
0.97
0.99
4.8%
5.1%
2.5%
2.0%
5.3%
NZD
0.74
0.71
0.72
0.76
0.77
0.74
3.7%
7.1%
4.3%
2.1%
3.6%
JPM USD index
82.2
82.8
82.9
82.7
82.3
83.9
-3.1%
-2.0%
-2.4%
DXY
78.7
81.4
81.7
81.7
81.7
84.5
-4.6%
1.1%
2.2%
Current Majors
Europe, Middle East & Africa
Americas
CHF
0.98
0.99
0.98
0.96
0.96
1.00
-2.8%
6.8%
4.0%
5.9%
6.0%
ILS
3.63
3.75
3.75
3.75
3.75
3.75
-2.2%
1.8%
4.2%
4.4%
3.7%
SEK
6.71
6.92
6.92
6.88
6.88
7.20
-5.2%
0.3%
8.6%
6.7%
4.9%
NOK
5.85
6.00
5.92
5.92
5.85
6.08
-1.4%
0.2%
5.9%
-0.9%
-0.8%
CZK
17.79
18.85
18.65
19.23
18.85
19.20
-6.7%
0.9%
8.5%
3.3%
-1.9%
PLN
2.87
3.00
2.96
2.92
2.88
2.96
0.5%
0.9%
8.0%
-0.3%
1.0%
HUF
200
212
212
208
206
212
-1.1%
0.5%
11.3%
-5.6%
-8.0%
RUB
30.49
29.66
29.21
28.99
29.36
29.74
7.7%
1.8%
0.7%
-1.5%
-1.1%
TRY
1.45
1.50
1.50
1.49
1.48
1.41
11.2%
8.2%
4.9%
3.7%
3.3%
ZAR
6.92
7.00
7.15
7.30
7.70
8.10
-8.2%
-1.8%
5.4%
6.7%
10.4%
ARS
3.96
4.05
4.15
4.15
4.25
4.25
6.7%
3.7%
-0.3%
-4.1%
-3.0%
BRL
1.67
1.75
1.80
1.82
1.83
1.85
0.2%
1.0%
4.3%
4.2%
6.4%
CLP
481.8
480
505
500
500
500
0.0%
2.6%
3.1%
5.3%
15.0% 7.0%
COP
1795
1800
1830
1850
1880
1900
-2.5%
3.1%
0.9%
13.9%
MXN
13.08
12.50
12.50
12.25
12.25
12.25
7.5%
4.9%
4.3%
4.3%
9.1%
PEN
2.80
2.78
2.84
2.82
2.79
2.78
1.4%
2.5%
-0.1%
3.3%
2.9%
-21.9%
-12.0%
0.1%
-49.9%
-49.9%
3.1%
4.0%
6.9%
VEF
Asia
4.29 114.37
LACI
4.30
5.50
5.50
5.50
5.50
112.71
110.48
110.90
110.37
109.91
CNY
6.69
6.60
6.50
6.40
6.30
6.20
4.6%
4.1%
1.8%
2.1%
2.0%
HKD
7.76
7.78
7.78
7.79
7.80
7.80
-0.7%
-0.4%
0.2%
-0.1%
-0.1%
IDR
8920
8700
8600
8550
8500
9200
2.2%
-3.4%
1.0%
5.4%
8.1%
INR
44.5
45.5
44.5
44.0
43.5
42.0
12.1%
6.6%
5.3%
4.7%
7.4%
KRW
1130
1150
1180
1140
1100
1100
4.1%
-1.6%
4.8%
3.0%
3.9%
MYR
3.09
3.10
3.07
3.04
3.02
3.02
3.8%
2.0%
1.5%
11.1%
12.8% 7.7%
PHP
43.72
43.25
42.75
42.25
42.00
42.25
7.7%
4.0%
3.1%
5.6%
SGD
1.31
1.32
1.30
1.29
1.28
1.33
-1.3%
-0.9%
2.7%
7.1%
7.9%
TWD
31.30
31.20
31.00
30.75
30.50
30.50
-1.4%
0.4%
2.4%
2.2%
3.2%
THB
30.18
30.25
30.10
30.00
29.70
30.80
-1.1%
0.6%
3.2%
10.6%
11.0%
115.0
115.1
115.9
117.4
119.0
119.0
2.6%
3.9%
4.5%
ADXY
Actual change in local FX vs EUR
Exchange rates vs Euro JPY
114
103
105
108
111
110
2.6%
4.5%
-5.5%
16.8%
GBP
0.87
0.87
0.88
0.88
0.87
0.85
2.0%
-4.8%
-4.5%
2.3%
5.4%
CHF
1.34
1.29
1.27
1.25
1.25
1.25
6.3%
7.5%
-3.0%
10.6%
12.5%
SEK
9.21
9.00
9.00
8.95
8.95
9.00
3.6%
1.0%
1.2%
11.4%
11.3%
NOK
8.03
7.80
7.70
7.70
7.60
7.60
7.8%
0.9%
-1.3%
3.4%
5.3%
CZK
24.4
24.50
24.25
25.00
24.50
24.00
2.0%
1.6%
1.1%
7.8%
4.2%
PLN
3.94
3.90
3.85
3.80
3.75
3.70
9.8%
1.6%
0.7%
4.1%
7.2% -2.3%
HUF
274
275
275
270
268
265
8.1%
1.2%
3.7%
-1.5%
RON
4.27
4.15
4.10
4.05
4.00
3.90
16.7%
6.3%
-0.2%
-0.8%
0.2%
TRY
1.98
1.95
1.95
1.94
1.92
1.76
21.6%
9.0%
-1.9%
8.4%
9.9%
RUB
41.86
38.56
37.98
37.69
38.17
37.18
17.7%
2.6%
-6.1%
3.3%
5.2%
↑ indicates revision resulting in stronger local FX , ↓ indicates revision resulting in weaker local FX * Negative indicates JPM more bullish on USD than consensus,** Consensus Economics Publication: Foreign Exchange Consensus Forecasts September 2010 Source: J.P.Morgan
132
14.5%
Ben Laidler (1-212) 622-5252
[email protected]
Latin America Equity Research November 2010
Commodities Forecasts • J.P. Morgan are above consensus with oil and copper forecasts. • J.P. Morgan are below consensus with nickel forecasts. • China’s share of 2010 global demand is 8% (oil), 41% (iron ore), 41% (aluminum), 39% (copper) and 31% (nickel). Energy Forecasts: Oil, thermal and coking coal WTI Crude J.P. Morgan forecasts Forward price Consensus Price WTI (billions bbls) Total Oil Supply Total Oil Demand Surplus (Deficit) China Demand
(US$/bbl)
2001 77.6 77.5 0.1 4.7
WTI (change) Price Global Supply Global Demand Chinese Demand China's share of demand
Q4 10 86 85.6 80
Q1 11 88 88.8 81.4
Q2 11 88 89.8 82.75
Q3 11 90 90.4 85
Q4 11 89.75 90.0 85
2012 105 92 93
2013 120 92 106
2014
2002 77.5 78.3 -0.8 5.0
2003 80.3 79.2 1.1 5.6
2004 83.6 83.1 0.5 6.4
2005 84.8 84.4 0.4 6.7
2006 85.6 85.4 0.2 7.2
2007 85.6 86.8 -1.2 7.6
2008 86.6 86.2 0.5 7.7
2009 85.2 84.9 0.2 8.3
2010 86.9 87.3 -0.4 9.2
2011 88.3 88.9 -0.6 9.6
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
1% 0% 8% 6%
1% 4% 10% 7%
5% 4% 16% 8%
2% 1% 4% 8%
1% 1% 8% 8%
2% 0% 4% 9%
-1% 1% 2% 9%
-1% -2% 7% 10%
3% 2% 10% 10%
2% 2% 5% 11%
92 95
Coal (USD/tonne) Hard coking coal Thermal coal
Q3'10 225 100
Q4'10 205 100
CY2010E 190 95
Q1'11 205 95
Q2'11 220 100
Q3'11 210 105
Q4'11 210 105
CY2011E 211 101
2012E 210 105
2013E 210 105
Coal (change) Hard coking coal Thermal coal
Q3'10
Q4'10 -9% 0%
CY2010E -7% -5%
Q1'11 8% 0%
Q2'11 7% 5%
Q3'11 -5% 5%
Q4'11 0% 0%
CY2011E 0% -4%
2012E 0% 4%
2013E 0% 0%
Source: J.P. Morgan estimates, Bloomberg.
Iron Ore Forecasts Iron Ore (US$/tonnes) J.P. Morgan forecasts Forward Price Iron ore (000s tonnes) World Supply World Demand Balance: Surplus (Deficit) China Demand Price Global Supply Global Demand Chinese Demand China's share of demand
4Q10E
1Q11E
2Q11E
3Q11E
4Q11E
2010E
2011E
2012E
2013E
2014E
145 158
140 156
150 153
150 149
140 144
145.1 145
145 145
145 132
116
98.6
2005
2006
2007
2008
2009e
2010e
2011e
2012e
2013e
2014e
1313 1299 14
1491 1482 9
1634 1619 15
1758 1725 33
1651 1631 20
1806 1806 0
1933 1937 -4
2059 2052 8
2206 2154 52
2339 2261 78
471
597
709
823
894
979
1067
1147
1214
1286
36%
14% 14% 27% 26%
10% 9% 19% 32%
8% 7% 16% 33%
-6% -5% 9% 39%
9% 11% 10% 41%
0% 7% 7% 9% 43%
0% 7% 6% 8% 45%
-20% 7% 5% 6% 47%
-15% 6% 5% 6% 49%
Source: J.P. Morgan estimates, Bloomberg.
133
Ben Laidler (1-212) 622-5252
[email protected]
134
Latin America Equity Research November 2010
Ben Laidler (1-212) 622-5252
[email protected]
Latin America Equity Research November 2010
LatAm Data
Ben Laidler (1-212) 622-5252
[email protected]
136
Latin America Equity Research November 2010
Ben Laidler (1-212) 622-5252
[email protected]
Latin America Equity Research November 2010
LatAm Dashboards Profit Outlook: Earnings Forecasts Matrix for Countries and Sectors EM Total Market Consumer Discretionary Consumer Staples Energy Financials Health Care Industrials Information Technology Materials Telecommunication Services Utilities Mexico Total Market Consumer Discretionary Consumer Staples Energy Financials Health Care Industrials Information Technology Materials Telecommunication Services Utilities Peru Total Market Consumer Discretionary Consumer Staples Energy Financials Health Care Industrials Information Technology Materials Telecommunication Services Utilities
Weight (%) 100.0 6.8 6.8 14.0 26.4 0.8 7.2 12.0 14.5 8.0 3.5 Weight (%) 100.0 9.7 25.4 0.0 6.0 0.0 4.7 0.0 16.2 38.0 0.0
Weight (%) 100.0 0.0 0.0 0.0 30.8 0.0 0.0 0.0 69.2 0.0 0.0
MSCI Mexico
Weight (%)
AMX Walmex Grupo Mexico Femsa Grupo Televisa Cemex Banorte Telmex Inbursa Grupo Modelo Grupo Carso
35.5 10.6 7.8 7.3 6.6 5.0 3.8 2.6 2.2 2.2 2.1
2010 28.1 29.0 19.5 17.9 24.7 24.0 30.7 57.3 52.7 8.0 9.3
Consensus 2011 16.4 14.1 11.6 15.7 21.8 17.2 13.8 4.7 27.4 10.9 16.9
2010 9.0 39.9 -4.9 NA 39.4 NA 23.8 NA -10.2 13.4 NA
Consensus 2011 20.4 14.0 20.4 NA 27.2 NA -3.7 NA 50.4 15.3 NA
2010 27.7 NA NA NA 21.4 NA NA NA 31.5 NA NA
Consensus 2011 31.1 NA NA NA 18.2 NA NA NA 38.2 NA NA
2012 22.5 NA NA NA NA NA NA NA 24.3 NA NA
2010 -1.6 -42.9 81.6 28.9 -3.5 -141.4 23.6 -12.0 17.2 20.4 4.9
Consensus 2011 15.9 19.5 49.3 18.6 13.2 -228.2 28.8 4.1 12.7 9.8 -11.5
2012 36.7 22.0 18.1 25.3 10.1 171.9 24.5 3.7 -3.0 7.9 -18.0
2012 13.9 14.4 11.2 12.0 17.2 16.1 15.7 11.0 13.0 10.9 14.7
2012 16.3 9.4 4.5 NA 15.7 NA NA NA 25.8 8.1 NA
LATAM Total Market Consumer Discretionary Consumer Staples Energy Financials Health Care Industrials Information Technology Materials Telecommunication Services Utilities Chile Total Market Consumer Discretionary Consumer Staples Energy Financials Health Care Industrials Information Technology Materials Telecommunication Services Utilities Colombia Total Market Consumer Discretionary Consumer Staples Energy Financials Health Care Industrials Information Technology Materials Telecommunication Services Utilities MSCI Chile Copec Cencosud Enersis CMPC Endesa SQM Lan Airlines Santander Chile CAP Falabella Colbun
Source: I/B/E/S, Bloomberg, MSCI, J.P. Morgan Note: Average earnings growth calculated based on earnings aggregate of MSCI contituents from IBES.
Weight (%) 100.0 5.3 11.9 16.3 22.2 0.0 4.5 1.1 24.4 8.8 5.5 Weight (%) 100.0 4.6 15.2 0.0 9.7 0.0 20.5 0.0 23.1 2.7 24.1
Weight (%) 100.0 0.0 5.9 29.0 39.5 0.0 0.0 0.0 16.3 0.0 9.2 Weight (%) 13.7 11.3 9.5 9.5 9.4 7.5 6.8 6.7 6.1 4.6 3.1
2010 15.8 45.1 11.5 -14.8 18.4 NA -18.1 12.1 84.5 3.1 5.6
Consensus 2011 21.4 27.9 21.5 7.1 19.6 NA 24.6 1.6 40.1 15.4 8.8
2010 23.0 65.0 84.1 NA 26.7 NA 51.3 NA 177.0 -2.3 -19.6
Consensus 2011 11.2 18.7 12.7 NA 9.4 NA 27.5 NA 4.1 15.4 8.0
2010 26.9 NA 20.1 26.3 36.7 NA NA NA -0.2 NA 21.1
Consensus 2011 47.1 NA 38.8 42.3 67.0 NA NA NA 45.7 NA 16.7
2012 -34.8 NA 24.6 NA NA NA NA NA NA NA 10.6
2010 70.8 112.8 -11.0 157.4 -2.6 -2.4 125.8 21.4 -1501.5 79.1 16.7
Consensus 2011 25.0 21.7 3.7 17.4 1.5 20.1 15.0 11.0 19.6 22.8 -14.3
2012 27.9 16.2 -1.4 20.6 4.9 41.5 17.0 7.6 7.8 20.1 91.7
2012 16.1 17.6 13.3 8.8 16.6 NA 26.7 2.2 19.7 6.9 19.4
2012 7.1 19.6 8.3 NA 23.1 NA NA NA 14.6 7.4 27.8
Brazil Total Market Consumer Discretionary Consumer Staples Energy Financials Health Care Industrials Information Technology Materials Telecommunication Services Utilities Argentina Total Market Consumer Discretionary Consumer Staples Energy Financials Health Care Industrials Information Technology Materials Telecommunication Services Utilities MSCI Brazil Petrobras Vale Itauunibanco Bradesco Ambev Itausa OGX BM&F Bovespa CSN Banco do Brasil BRF Foods MSCI Latam (others) Buenaventura Ecopetrol Southern Copper Credicorp Bancolombia Suramericana Bancolombia SA Inveragos ISA Cementos Argos Exito
Weight (%) 100.0 4.8 8.8 22.5 26.5 0.0 3.3 1.6 25.1 2.4 5.0 Weight (%) 100.0 0.0 0.0 10.0 44.5 0.0 0.0 0.0 NA 39.4 0.0 Weight (%) 19.0 16.4 9.4 6.6 3.4 3.0 2.9 2.7 2.1 1.9 1.6 Weight (%) 1.2 1.1 1.0 1.0 0.5 0.5 0.4 0.4 0.3 0.2 0.2
2010 16.3 46.7 21.3 -15.5 16.9 NA -47.7 12.1 105.0 -17.5 18.8
Consensus 2011 21.6 34.5 23.6 6.1 18.7 NA 39.7 1.6 41.2 15.7 8.8
2012 16.1 21.2 18.7 5.2 15.7 NA 31.6 2.2 11.1 9.0 12.1
2010 17.1 NA NA NM 7.0 NA NA NA NA 21.4 NA
Consensus 2011 4.8 NA NA -41.8 3.6 NA NA NA NA 27.7 NA
2012 6.7 NA NA 9.6 11.8 NA NA NA NA 3.3 NA
2010 -0.9 97.4 32.1 13.9 13.9 29.9 89.7 37.9 -33.0 19.9 5.3
Consensus 2011 -4.1 47.8 20.1 16.4 12.5 16.6 75.7 19.2 62.2 12.9 66.7
2012 0.9 12.4 15.4 12.3 6.5 42.9 172.3 19.5 5.8 18.4 32.9
2010 13.6 31.4 77.0 26.3 11.0 2.0 11.0 NA 30.3 1.7 17.5
Consensus 2011 36.0 31.4 50.1 18.1 24.1 2.0 24.1 NA -3.3 -7.1 24.9
2012 -4.4 52.2 22.7 18.0 20.5 NA 20.5 NA NA 22.6 57.8
Updated as October, 2010
137
Ben Laidler (1-212) 622-5252
[email protected]
Latin America Equity Research November 2010
Profit Growth Outlook: Changes in 2010 and 2011 EPS Forecasts Emerging Markets (EM)
World
125
145
2011
155
2011
145
115
85 Feb-09
Jul-09
Dec-09
May-10
Oct-10
2010
140 130
100 90
85 Feb-09
85 Feb-09
Dec-09
May-10
Oct-10
105
120
100 2011
Dec-09
May-10
Oct-10
70 Feb-09
2010
Dec-09
May-10
Oct-10
70 Feb-09
May-10
Oct-10
2011
2010
105 95
2010
85 Jul-09
Dec-09
May-10
Oct-10
75 Feb-09
Jul-09
Dec-09
May-10
Oct-10
Colombia 200
2011
150 2011
Dec-09
115
80
170
90
125
Peru
100
Jul-09
135
75 Jul-09
80 Feb-09
Chile
85
Argentina 110
Oct-10
2011
90
80
90
May-10
95
90
100
Dec-09
Mexico
130
100
2010
Jul-09
Jul-09
2010
110
2010
95
110
120
80 Feb-09
120
115
Brazil
2011
110
130
105
Jul-09
2011
140
95
EM Latin America 150
150
2011
125
105 95
160
135
125 2010
EM Europe
165
135
115 105
EM Asia
155
135
170 2011
140
130
80
60 50 Feb-09
110
110
70 2010 Jul-09
Dec-09
May-10
Oct-10
2010
90
80
70 Feb-09
50 Feb-09
Jul-09
Dec-09
May-10
Oct-10
2010 Jul-09
Dec-09
May-10
Source: I/B/E/S Notes: The dashboard aims to show changes in earnings expectations. All year ends are for December. EPS figures are normalized, starting at 100 on base date Feb 2009 for ease of comparison. These numbers are directly from IBES aggregate and may differ from those in the growth expectations pages where adjustments are made for exceptional items.
138
Oct-10
Updated as of October 2010
Ben Laidler (1-212) 622-5252
[email protected]
Latin America Equity Research November 2010
Profit Growth Outlook: Changes in 2010 and 2011 EPS Forecasts Consumer Staples
Consumer Discretionary 190
Energy
115
2011
170
2011 130
155 145
2011
115
125
95 130 110 90 Feb-09
Dec-09
May-10
Oct-10
65 Feb-09
Jul-09
155
140 130
Dec-09
May-10
Oct-10
Jul-09
100
125
90
115
2010
2011
Dec-09
May-10
Oct-10
95 Feb-09
May-10
Oct-10
Oct-10
60 Feb-09
May-10
Oct-10
125
2011
115 105 2010
80
May-10
Dec-09
2011
135
100
2010
Dec-09
Jul-09
145
120
Jul-09
85 Feb-09
Telecom
140
105
70
Dec-09
160
135
110
Jul-09
70 Feb-09
2010
95
Materials
145
2011
120
60 Feb-09
85
Information Technology
Industrials
80
105
2010
75
Jul-09
115
2010
100
85
2010
2011
135
105
150
Financials
145
125
Jul-09
Dec-09
May-10
95
Oct-10
85 Feb-09
2010 Jul-09
Dec-09
May-10
Oct-10
Utilities 190 2011
170 150 130 110 90 Feb-09
2010
Jul-09
Dec-09
May-10
Oct-10
Source: I/B/E/S Notes: The dashboard aims to show changes in earnings expectations. All year ends are for December. EPS figures are normalized, starting at 100 on base date Feb 2009 for ease of comparison. These numbers are directly from IBES aggregate and may differ from those in the growth expectations pages where adjustments are made for exceptional items.
Updated as of October 2010
139
Ben Laidler (1-212) 622-5252
[email protected]
Latin America Equity Research November 2010
Value: Regional and Countries Valuations P/E (x)
Brazil Mexico Chile Argentina Colombia* Peru* EMF LATAM* Global* USA* Europe* Japan* EMF Asia EMF EMEA* Emerging Markets Korea Taiwan China Russia* South Africa* India Malaysia Poland* Turkey* Thailand Indonesia Hungary* Egypt Czech Republic Philippines
28-Oct-10 MSCI Index 240,463 33,007 5,857 239,902 3,031 3,371 77,963 316 1,129 1,151 511 667 418 46,685 531 296 69 836 778 798 553 1,836 1,007,187 395 4,675 1,322 1,379 333 763
Div. Yield (%)
Avg.
Current
12m
Prospective
02-07
Trailing
Fwd
2009
2010E
11.4 15.6 25.2 29.0 17.4 15.2 13.7 18.4 19.0 16.4 19.4 14.6 14.6 14.3 11.5 24.7 16.1 12.7 14.3 18.9 16.3 6.5 7.1 11.8 13.0 12.1 17.8 19.4 16.9
13.1 17.8 19.9 13.9 26.7 40.3 14.6 13.5 15.5 10.7 NM 14.3 11.3 13.6 11.3 15.1 15.1 8.2 14.9 21.4 18.2 13.9 12.1 15.8 17.6 13.1 13.0 10.4 19.1
10.9 15.1 17.7 13.0 18.3 16.6 11.9 11.6 13.2 9.0 12.8 12.4 9.1 11.6 10.2 12.7 12.7 6.4 11.8 17.6 15.1 11.9 11.0 13.7 14.9 10.5 10.7 9.9 16.7
14.9 19.2 23.8 14.4 33.1 26.5 16.3 16.4 20.1 13.9 NM 18.3 14.2 16.8 15.7 26.0 18.5 11.2 18.4 25.0 22.0 16.6 14.0 18.0 20.5 12.8 16.4 10.2 22.0
12.8 17.6 19.3 13.8 25.7 20.7 14.0 13.0 14.8 10.3 14.5 13.7 10.8 13.1 10.7 13.9 14.6 7.8 14.3 20.8 17.6 13.5 11.8 15.4 17.1 13.1 12.5 10.4 18.7
P/BV (x)
Avg.
Current
Prospective
2011E
02-07
Trailing
2009
2010E
10.6 14.6 17.4 12.9 16.8 15.8 11.5 11.3 12.9 8.8 12.4 12.2 8.9 11.3 10.2 12.5 12.4 6.2 11.5 17.0 14.6 11.6 10.8 13.4 14.6 10.1 10.4 9.8 16.3
3.8 1.8 2.3 1.3 3.0 3.8 2.9 2.1 1.8 2.9 1.1 2.3 2.4 2.4 2.0 3.0 2.3 1.8 3.0 1.5 2.4 2.5 2.2 3.3 3.2 1.9 3.0 3.7 1.9
3.1 3.4 2.5 NA 2.1 2.5 3.1 2.7 2.0 3.5 2.2 2.3 2.6 2.4 1.0 3.4 2.4 1.6 2.9 1.2 3.1 3.1 2.5 2.9 2.3 2.8 3.2 6.4 3.3
2.4 2.4 1.3 NA 1.0 0.9 2.3 2.5 1.9 3.3 2.1 2.0 2.3 2.1 0.8 2.8 2.1 0.3 2.4 1.0 2.4 2.3 3.4 2.6 2.0 1.9 2.5 5.4 3.1
2.6 2.4 1.7 NA 1.9 2.1 2.5 2.7 2.0 3.5 2.2 2.3 2.7 2.5 1.0 3.5 2.5 1.8 2.9 1.2 3.2 3.3 2.4 3.0 2.4 3.0 3.3 6.6 3.4
ROE (%)
Avg.
Current
Prospective
2011E
02-07
Trailing
2009
2010E
2011E
2008
2009
2010E
2011E
3.3 3.6 2.6 NA 2.2 2.6 3.3 3.0 2.1 4.0 2.4 2.7 3.3 2.9 1.2 4.2 2.9 2.3 3.6 1.3 3.4 4.0 2.9 3.2 2.8 3.8 4.1 6.7 3.1
2.0 2.8 1.9 2.5 1.9 3.2 2.2 2.5 2.9 2.3 1.8 2.0 2.3 2.1 1.6 2.0 2.4 1.8 2.6 3.9 2.0 2.2 1.9 2.2 3.1 2.6 4.1 1.9 1.9
1.7 2.8 2.2 1.8 2.4 5.7 1.9 1.7 2.0 1.6 1.0 2.1 1.6 2.0 1.5 1.9 2.4 1.1 2.3 3.4 2.2 1.6 2.1 2.5 4.3 1.4 1.4 1.8 3.0
2.3 2.6 2.5 NA 1.5 6.9 2.4 1.8 2.2 1.6 1.1 2.3 1.7 2.2 1.7 2.0 2.7 1.2 2.6 3.7 2.4 1.9 2.4 2.7 5.0 1.6 1.5 1.9 3.2
1.8 2.9 2.4 NA 3.0 5.4 2.0 1.6 2.0 1.6 1.0 2.1 1.5 2.0 1.5 1.9 2.4 1.1 2.2 3.4 2.2 1.6 2.1 2.4 4.2 1.4 1.4 1.8 3.0
1.7 2.7 2.2 NA 3.0 4.5 1.9 1.5 1.8 1.5 1.0 1.8 1.4 1.8 1.3 1.7 2.1 0.9 2.0 2.9 2.1 1.5 1.9 2.2 3.6 1.3 1.3 1.7 2.8
18.7 19.3 13.3 22.8 11.4 30.6 18.5 11.0 11.3 15.0 7.8 10.6 17.2 12.3 7.7 5.4 14.2 17.3 19.1 12.9 14.2 15.4 17.8 12.1 28.4 22.0 12.7 19.7 13.2
15.3 13.7 10.5 NA 4.5 13.9 14.5 11.1 11.2 11.7 NM 13.2 14.0 13.6 11.4 8.0 15.2 12.7 14.4 14.3 11.2 11.6 18.8 14.9 26.7 12.9 12.0 20.1 14.9
13.7 16.5 12.2 NA 11.8 13.8 13.9 13.1 14.1 15.7 7.0 15.9 15.0 15.8 15.0 13.9 17.2 14.4 16.6 17.0 13.1 12.7 19.1 16.6 26.5 11.2 11.8 18.0 16.5
16.2 18.6 12.7 NA 17.6 15.1 16.3 14.0 14.8 17.4 7.7 16.0 16.4 16.4 13.9 14.4 17.9 15.9 18.2 18.3 14.6 12.9 18.2 17.2 26.4 13.2 13.0 18.1 17.6
Source: I/B/E/S, MSCI, J.P. Morgan * Market forecast numbers are derived from bottom-up calculations of each individual MSCI constituents using I/B/E/S estimates For all other markets, forecast numbers are derived from bottom-up calculations of each individual MSCI constituents using JPM estimates for covered stocks and I/B/E/S estimates for the rest. USA, Europe and Japan PE are I/B/E/S aggregate estimates. Japan Valuation estimates are for the financial year ending March
140
Updated as of October 28
Ben Laidler (1-212) 622-5252
[email protected]
Latin America Equity Research November 2010
Brazil
Mexico
Chile
Argentina
Peru
14.4
12.0
14.4
13.3
15.4
31.0
NA
NA
NA
18.4
18.4
17.3
20.4
19.9
20.1
24.0
24.6
NA
34.5
Energy
10.4
10.3
8.7
8.2
5.6
12.0
10.3
10.0
NA
NA
10.8
NA
20.7
Financials
10.9
9.3
9.2
12.3
10.8
12.4
12.6
12.4
15.2
14.1
12.5
15.3
11.3
Health Care
11.4
10.5
10.8
18.8
14.1
22.0
NA
NA
NA
NA
NA
NA
NA
Industrials
13.4
12.1
13.2
13.4
10.7
14.4
22.9
24.3
20.9
22.3
NA
NA
NA
Information Technology
12.8
12.2
13.6
11.2
9.9
12.3
10.4
10.4
NA
NA
NA
NA
NA
Materials Telecommunication Services Utilities Market Aggregate Sector Neutral*
11.8 12.0 12.3 11.6 12.0
13.6 13.2 12.8 13.2 11.5
10.5 10.4 10.7 9.0 10.9
11.2 11.6 11.8 11.6 11.6
12.2 10.9 10.8 9.1 10.9
12.3 12.3 13.7 12.4 12.9
10.1 11.0 10.9 11.9 12.9
8.6 8.0 9.4 10.9 12.3
16.8 12.0 NA 15.1 14.4
19.5 11.7 13.1 17.7 15.9
NA 9.1 NA 13.0 12.6
16.6 NA NA 16.6 13.5
51.5 NA 37.3 18.3 21.2
Colombia
EMF LATAM
12.8
14.2
EMF EMEA
12.8
12.7
Emerging Markets
12.8
14.5
Europe
13.9
Consumer Staples
USA
Consumer Discretionary
12-month forward PE
Global
EMF Asia
Value: PE Matrix for Countries and Sectors
Europe
Emerging Markets
EMF EMEA
EMF Asia
EMF LATAM
Brazil
Mexico
Chile
Argentina
Peru
Colombia
Consumer Discretionary Consumer Staples Energy Financials Health Care Industrials Information Technology Materials Telecommunication Services Utilities Market Aggregate
USA
Trailing P/B
Global
Value: P/BV Matrix for Countries and Sectors
2.1 3.0 1.7 1.2 2.6 2.1 2.9 2.1 1.9 1.4 1.7
2.8 3.5 1.9 1.1 2.5 2.7 3.7 2.8 2.0 1.5 2.0
2.0 3.1 1.6 1.0 3.1 2.4 2.5 1.9 1.6 1.4 1.6
2.7 3.5 1.4 2.1 4.3 2.1 2.3 2.2 2.5 1.3 2.0
3.2 4.0 1.0 2.0 3.2 2.1 1.1 2.7 2.8 1.1 1.6
2.5 3.7 2.4 2.1 5.2 2.0 2.3 2.0 2.1 1.5 2.1
3.0 3.1 1.4 2.6 NA 2.8 18.8 2.2 3.3 1.2 1.9
2.8 3.0 1.4 2.5 NA 3.3 18.8 2.3 1.3 0.9 1.7
3.2 3.5 NA 2.6 NA 1.8 NA 1.3 5.3 NA 2.8
4.9 3.0 NA 4.2 NA 3.2 NA 2.6 2.8 2.1 2.2
NA 1.9 0.7 2.7 NA NA NA NA 1.5 NA 1.7
NA NA NA 3.8 NA NA NA 7.1 NA NA 5.6
NA NA 5.1 2.1 NA NA NA 1.4 NA 2.7 2.3
Source: IBES, MSCI, J.P. Morgan. Note: PEs are derived from bottom-up calculations of each individual MSCI constituents using JPM estimates for covered stocks and IBES estimates for the rest. *Sector neutral PE are calcuated by using sector weights of MSCI EM and sector PE of respective markets (MSCI EM sector PE used where country sector does not exist) Updated as of October 28
141
Ben Laidler (1-212) 622-5252
[email protected]
Latin America Equity Research November 2010
Value: Trailing P/BV for Regions/Countries Emerging Markets (EM)
World
EM Asia
3.3
4.5
3.0
4.0
+1SD
3.5
-1SD
1.5
2.4
2.4
2.1
2.1
1.8
1.8
1.5
1.5
-1SD
1.2
1.0 97
98
99
00
01
02
03
04
05
06
07
08
10
95
97
98
99
00
01
02
EM Latin America
+1SD
3.5
2.0
2.0
1.5
1.5
1.0
1.0
-1SD 00
01
02
03
04
05
08
10
06
07
08
10
95
98
99
00
01
02
04
98
99
00
01
02
03
04
05
06
07
08
99
00
01
02
03
04
05
07
08
10
03
04
05
06
07
08
09
+1SD
2.3 2.0 1.7 1.4 1.1
-1SD
-1SD
0.8 97
98
99
00
01
02
03
04
05
06
07
08
95
10
97
98
99
00
01
Colombia
02
04
05
06
07
08
10
6.0
3.5
+1SD
5.0
3.0
+1SD
03
USA
4.0
+1SD
2.5
4.0
2.0 3.0
1.5
2.0
06
02
2.6
95
10
-1SD
-1SD
95
97
98
99
00
01
02
03
04
05
06
-1SD
2.0
0.5
1.0 98
01
2.9
1.0
97
00
Chile
1.3 97
99
10
+1SD
1.6
-1SD
0.0
3.0
95
08
1.9
4.0
0.0
07
2.2
3.0
-1SD
06
3.1
6.0
1.0
05
3.2
Peru
2.0
03
2.5
5.0
07
08
10
Source: I/B/E/S Notes: The dashboard aims to show historical consensus trailing P/BV with +/-1 SD bands since Dec 1995 . For EMEA Trailing P/BV since Feb 1999.
142
97
2.8
95
-1SD
1.0
0.9
7.0
+1SD
1.5
-1SD
3.4
Argentina 5.0
4.0
2.0
Mexico
+1SD
0.5
0.0 99
07
3.7
2.5
98
06
3.5
2.5
97
05
4.0
3.0
95
04
4.0
3.0
0.5
03
2.5
Brazil
4.0
+1SD 3.0
1.2
0.9 95
+1SD
2.7
3.0
2.0
3.5
3.0
+1SD
2.7
2.5
EMEA
3.3
0.0
1.0 95
97
98
99
00
01
02
03
04
05
06
07
08
10
95
97
98
99
00
01
02
03
04
05
06
07
08
10
Updated as of October 2010
Ben Laidler (1-212) 622-5252
[email protected]
Latin America Equity Research November 2010
Value: Forward PE for Regions/Countries Emerging Markets (EM)
World
EM Asia
20.0
25.0
30.0
18.0
17.0
25.0
15.0
14.0
20.0
12.0
11.0
15.0
9.0
+1SD
+1SD
22.0
EMEA
+1SD
+1SD
19.0 16.0 13.0
-1SD
7.0 95
97
98
99
00
-1SD
8.0
10.0
01
02
03
04
05
06
07
08
-1SD
95
97
98
99
00
01
EM Latin America
02
03
04
05
06
07
08
95
10
97
98
99
00
01
Brazil
16.0
03
04
05
06
07
08
95
10
97
98
99
00
01
02
03
04
05
06
07
08
10
Chile
17.0
23.0
+1SD
+1SD
+1SD
02
Mexico
14
14.0
3.0
5.0
5.0
10
-1SD
6.0
10.0
+1SD
12
15.0
20.0
10
13.0
17.0
8
11.0
14.0
12.0 10.0 8.0
-1SD
6.0
6
4.0 95
97
98
99
00
01
02
03
04
05
06
07
08
10
9.0
-1SD
7.0
4 98
99
00
01
02
03
05
06
07
08
09
95
10
97
98
99
00
01
Peru
Argentina
03
04
05
06
07
08
10
95
97
98
99
00
01
02
03
04
05
06
07
08
10
USA
24 24
21 25
+1SD
24
+1SD
8.0
Colombia
32
30
02
-1SD
11.0
-1SD
18
20
+1SD
21
+1SD
15 18
12
16
15
9 10
8
-1SD
5
-1SD
0 97
98
Source: I/B/E/S
12
3 0
95
15
-1SD
6
99
00
01
02
03
04
05
06
07
08
10
0 95
97
98
99
00
01
02
03
04
05
06
07
08
10
-1SD
9 95
97
98
99
00
01
02
03
04
05
06
07
08
10
95
97
98
99
00
01
02
03
04
05
06
07
08
10
Updated as of October 2010
143
Ben Laidler (1-212) 622-5252
[email protected]
Latin America Equity Research November 2010
Fair Value P/E*: Gordon Growth P/E MSCI Brazil
MSCI LatAm 15
17 12 Mth Fwd PE
12 Mth Fwd PE
Gordon Growth P/E
15
MSCI Mexico 17
Gordon Growth P/E
12 Mth Fwd PE
MSCI Chile Gordon Growth P/E
Gordon Growth P/E
18 16
13 9
11
12 Mth Fwd PE
20
15
12
13
22
14 11
12
9 6
10
9
7
8
5 Jan 03 Feb 04 Mar 05 Apr 06 May 07 Jun 08
Jul 09
Aug 10
3 Jan 03
Feb 04
Mar 05
Apr 06
May 07
Jun 08
Jul 09
Aug 10
7 Jan 03
Feb 04
Mar 05
Apr 06
May 07
Jun 08
Jul 09
Aug 10
6 Jan 03
Feb 04
Mar 05
Apr 06
May 07
Jun 08
Jul 09
Aug 10
Source: MSCI, J.P. Morgan. *We use a re-organized Gordon growth model to derive a ‘fair value’ P/E = (ROE-g)/ROEx(COE-g). 1) COE made up of the US 10-year treasury yield as the risk-free rate, the respective country EMBIG spreads, and a fixed equity market risk premium of 5% (30-year average) 2) We take the potential GDP growth as the growth rate; 3)the 12m-forward I/B/E/S consensus ROE
Value: Forward PE for Sector Consumer Staples
Consumer Discretionary
Energy
20
30
Financials 18
20
+1SD 25
15
+1SD
17
15
+1SD
+1SD 12
20 14
10
11
5
9
15
-1SD
10
5 95
97
98
99
00
01
02
03
04
05
06
07
08
-1SD
95
97
98
99
00
Industrials
01
02
03
04
05
06
07
08
95
10
97
98
99
00
01
03
05
06
07
08
95
10
97
98
99
00
01
02
03
04
05
06
07
08
10
Utilities 32
21
+1SD
24
+1SD
12
15
04
24
14
+1SD
02
Telecom
Materials 16
21 18
3
0
8
10
-1SD
6
-1SD
18
+1SD
10 12
16
15 8
9
12
6 6
-1SD
3 98
99
00
01
02
03
05
06
07
8
08
09
10
9
-1SD
4 2 97
98
99
00
01
02
03
04
05
06
07
Source: I/B/E/S Notes: The dashboard aims to show historical consensus forward PE with +/-1 SD bands since Dec 1995 . No Heathcare sector
144
0
6 95
08
10
-1SD
-1SD 95
97
98
99
00
01
02
03
04
05
06
07
08
10
95
97
98
99
00
01
02
03
04
05
06
07
08
10
Updated as of October 2010
Ben Laidler (1-212) 622-5252
[email protected]
Latin America Equity Research November 2010
Economic Forecasts: Changes in Real GDP Forecasts Real GDP Growth (% Y/Y) JPM Consensus 2010E 2011E 2010E 2011E LATAM Argentina Brazil Colombia Mexico Peru EMEA Russia South Africa Poland Turkey Hungary Egypt Czech Republic Morocco Jordan Asia S Korea Taiwan China India Thailand Indonesia Philippines Malaysia
Change in Forecasts Past 3 months (%) JPM Consensus 2010E 2011E 2010E 2011E
Economic Momentum GDP SAAR 3Q 10E 4Q 10E
2Q10E
Inflation (% Y/Y) 2010E 2011E
1Q11E
8.5 7.5 4.5 4.5 8.2
5.5 4.5 4.1 3.5 6.0
8.3 7.1 4.6 4.7 7.0
4.8 4.5 4.7 3.5 6.0
0.0 0.0 0.0 0.0 0.9
1.0 0.5 0.0 0.0 0.0
2.0 0.6 1.2 0.3 1.0
0.3 0.0 0.7 -0.1 0.7
12.6 5.1 3.9 13.5 12.7
0.0 2.3 3.7 -3.6 4.8
2.0 3.2 4.0 3.1 3.5
6.0 5.7 4.0 2.9 5.8
8.2 5.0 2.2 4.2 1.7
10.0 5.4 3.4 3.9 2.3
4.3 2.9 3.5 7.1 1.0 na 2.0 na na
4.7 3.1 3.8 4.3 2.8 na 3.2 na na
4.2 3.1 3.2 7.1 0.9 na 2.0 na na
4.3 3.6 3.5 4.5 2.6 na 2.0 na na
-0.7 -0.2 -0.1 1.2 0.0 na 0.0 na na
-0.3 -0.4 0.0 -0.7 -0.3 na 0.0 na na
0.2 0.0 0.2 0.8 0.4 na 0.3 na na
-0.2 -0.1 0.0 0.2 -0.2 na -0.2 na na
4.3 3.2 4.1 11.7 0.0 na 3.8 na na
2.5 3.1 3.5 -3.0 2.0 na 2.5 na na
5.0 3.2 3.5 -8.5 2.0 na 2.3 na na
5.0 3.1 3.0 6.1 2.0 na 2.5 na na
6.8 4.4 2.5 8.6 4.9 na na na na
7.8 4.4 2.8 6.5 3.6 na na na na
6.1 9.9 10.0 8.3 8.5 6.0 7.0 6.8
4.0 4.1 9.0 8.5 4.0 5.4 4.5 4.6
6.0 4.6 10.0 8.4 7.5 6.0 5.9 6.8
4.6 4.0 9.0 8.4 4.5 6.3 5.0 5.2
0.0 1.1 0.0 0.0 0.0 0.0 0.2 -0.4
0.0 -0.1 0.2 0.0 -1.0 0.0 0.2 0.0
0.0 0.0 0.0 0.2 1.9 0.0 1.8 1.9
0.0 0.0 0.1 na 0.1 0.0 0.7 0.8
5.8 7.2 7.2 8.5 0.6 7.5 7.7 7.2
2.5 1.5 8.1 8.0 2.8 4.5 0.8 0.0
3.8 2.3 8.7 8.9 2.8 5.0 1.6 2.0
4.0 4.2 9.5 8.0 4.9 5.3 5.7 4.9
2.7 1.0 2.8 11.6 3.1 5.1 3.7 1.5
3.3 1.8 2.7 10.2 1.9 5.3 2.3 1.7
2010E GDP Growth: JPM Minus Consensus
Change in Consensus Forecasts for 2010E GDP over last 3 months (%)
1.5
1.2
0.8
Source: J.P. Morgan estimates, Bloomberg Note: Consensus estimates for Jordan, Egypt and Israel sourced from WES and Morocco from EIU
Chile
Malaysia
Philippines
Colombia
Peru
Argentina
Turkey
Thailand
China
Indonesia
S Korea
Poland
Brazil
Taiwan
India
South Africa
Mexico
Hungary
Russia
Czech Republic
Argentina
Russia
Poland
Hungary
Taiwan
Peru
China
Mexico
Brazil
Chile
Turkey
South Africa
Thailand
Philippines
Malaysia
Colombia
(0.6) S Korea
0.0
(1.5) Indonesia
(0.8)
Czech Republic
0.6
0.0
Updated as of October 28
145
Ben Laidler (1-212) 622-5252
[email protected]
Latin America Equity Research November 2010
Economic Forecasts: Policy Rate Trend and Forecasts Country
Official interest rate
Q1'10
Q2'10
Q3'10
Current
Q4'10F
Q1'11F
Q2'11F
Q3'11F
Last Change
Next Change
Latin America Brazil
SELIC overnight rate
8.75
10.25
10.75
10.75
10.75
11.50
12.50
12.50
21 Jul 10 (+50bp)
Mar 11 (+25bp)
Mexico
Repo rate
4.50
4.50
4.50
4.50
4.50
4.50
4.75
5.25
17 Jul 09 (-25bp)
Jun 10 (+25bps)
Chile
Discount rate
0.50
0.50
2.50
2.75
3.25
4.00
4.25
4.25
16 Sep 10 (+50bp)
16 Nov 10 (+25bp)
Colombia
Repo rate
3.50
3.00
3.00
3.00
3.00
4.00
5.00
5.50
30 Apr 10 (-50bp)
1Q 11 (+50bp)
Peru
Reference Rate
1.25
1.75
3.00
3.00
3.00
3.00
3.50
4.25
9 Sep 10 (+50bp)
May 11 (+25bp) On hold
Developed Markets United States
Federal funds rate
0.125
0.125
0.125
0.125
0.125
0.125
0.125
0.125
16 Dec 08 (-87.5bp)
Euro Area
Refi Rate
1.00
1.00
1.00
1.00
1.00
1.00
1.00
1.00
7 May 09 (-25bp)
On hold
Japan
Overnight Call Rate
0.10
0.10
0.10
0.05
0.05
0.05
0.05
0.05
5 Oct 10 (-5bp)
On hold
Europe, Middle East and Africa Czech Republic
2-week repo rate
1.00
0.75
0.75
0.75
0.75
0.75
1.00
1.25
6 May 10 (-25bp)
2Q 11 (+25bp)
Hungary
2-week deposit rate
5.50
5.25
5.25
5.25
5.25
5.25
5.25
5.50
26 Apr 10 (-25bp)
3Q 11 (+25bp)
Poland
7-day intervention rate
3.50
3.50
3.50
3.50
3.50
3.50
3.75
4.00
24 Jun 09 (-25bp)
2Q 11 (+25bp)
Russia
1-week deposit rate
2.75
3.50
2.75
2.75
2.75
2.75
2.75
3.00
31 May 10 (-50bp)
3Q 11 (+25bp)
South Africa
Repo rate
6.50
6.50
6.00
6.00
5.50
5.50
5.50
5.50
9 Sep 10 (-50bp)
18 Nov 10 (-50bp)
Turkey
O/n borrowing rate
6.50
6.50
7.00
7.00
7.00
7.00
7.00
7.00
-
4Q 11 (+50bp)
EM Asia China
1-year working capital
5.31
5.31
5.31
5.56
5.56
5.56
5.81
5.81
19 Oct 10 (+25bp)
2Q 11 (+25bp)
Korea
Overnight call rate
2.00
2.00
2.25
2.25
2.50
2.75
2.75
2.75
9 Jul 10 (+25bp)
4Q 10 (+25bp)
India
Repo rate
5.00
5.00
6.00
6.00
6.25
6.50
6.50
6.75
16 Sep 10 (+25bp)
2 Nov 10 (+25bp)
Thailand
1-day repo rate
1.25
1.25
1.75
1.75
2.00
2.00
2.00
2.00
26 Aug 10 (+25bp)
1 Dec 10 (+25bp)
Taiwan
Official discount rate
1.38
1.38
1.50
1.50
1.50
1.50
1.50
1.63
30 Sep 10 (+12.5bp)
3Q 11 (+12.5bp)
Change in policy rates
Colombia Brazil India Peru Thailand Czech Poland Korea China Hungary Russia Japan Mexico EU USA Turkey Taiwan SAfrica -1100
Change from Aug 07 18
Forecast change to Jun 11
Nominal Policy Rate 14
10
6
Real Rate
2
-900
Source: J.P. Morgan Economics, Bloomberg.
146
Emerging Markets policy rate 22
-700
-500
-300
-100
100
300
-2 1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
Updated as of October 28
2010
Ben Laidler (1-212) 622-5252
[email protected]
Latin America Equity Research November 2010
Commodity Prices: Movement and Forecasts
1,200.0 1,000.0
Platinum
Silver
Gold 1,400.0
2300
21.0
2000
625.0
18.0
1700
525.0
1400
425.0
1100
325.0
15.0
J.P. Morgan
J.P. Morgan
12.0
800.0
9.0
600.0
Apr 06
Jul 07
Nov 08
Feb 10
3.0 Dec 04
Jun 11
Apr 06
Copper
Jul 07
Nov 08
Feb 10
Jun 11
Nov 08
Feb 10
Crude
Apr 06
Jul 07
Nov 08
Feb 10
Jun 11
600 550 500 450 400 350 300 250 200 150 100 Jan-02
400 80.0 300 50.0 20.0 Dec 04
200
Apr 06
Jul 07
Nov 08
Feb 10
100 Jan 02
Jun 11
Nov 08
Feb 10
Apr 03
Jul 04
Oct 05
Jan 07
Apr 08
Aug 09
Jun 11
50,000.0
J.P. Morgan
20,000.0 10,000.0 Apr 06
Jul 07
Nov 08
Feb 10
Jun 11
S&P GSCI Agricultural Index
500
J.P. Morgan
Jul 07
40,000.0
0.0 Dec 04
600
110.0
Apr 06
Nickel
J.P. Morgan
S&P GSCI Industrial Metals Index
140.0
125.0 Dec 04
60,000.0
1,000.0
900.0 Dec 04
Jun 11
Jun 11
2,000.0
1,200.0 Jul 07
Feb 10
30,000.0
1,800.0 1,500.0
Apr 06
Nov 08
3,000.0
2,100.0
2,000.0
Jul 07
4,000.0
2,400.0 J.P. Morgan
J.P. Morgan
Zinc
J.P. Morgan
2,700.0
6,000.0
0.0 Dec 04
Apr 06
5,000.0
3,000.0
8,000.0
725.0
225.0
500 Dec 04
Aluminum
10,000.0
4,000.0
J.P. Morgan
800
6.0
400.0 Dec 04
Palladium
24.0
Apr-03
Jul-04
Oct-05
Jan-07
Apr-08
Aug-09
0.0 Dec 04
Apr 06
Jul 07
Nov 08
Feb 10
Jun 11
S&P Goldman Sachs Commodity Index 950 850 750 650 550 450 350 250 150 Jan-02
Apr-03
Jul-04
Oct-05
Jan-07
Apr-08
Aug-09
Commodity Price Forecasts Spot Price
10Q4
11Q1
11Q2
11Q3
2009
2010E
2011E
WTI oil $/bbl
82.2
81.0
78.0
81.0
83.0
61.9
78.5
82.5
Brent oil $/bbl
82.8
83.0
80.0
83.0
85.0
62.5
79.2
84.5
3.4
4.5
4.8
5.0
5.3
4.7
5.1
5.4
1,335
1,275
1,250
1,250
1,250
976
1,221
1,438
Natural gas $/mmbtu Gold ($/oz) Silver ($/oz)
23.7
19.6
19.2
19.2
19.2
14.7
18.7
22.1
Platinum ($/oz)
1,685
1,700
1,750
1,800
1,800
1,205
1,598
1,600
626
600
650
675
675
262
495
613
Copper ($/metric ton)
8,330
6,750
6,750
7,000
6,800
5,157
7,294
8,713
Aluminium ($/metric ton)
2,229
2,100
2,100
2,150
2,175
1,696
2,175
2,338
Zinc ($/metric ton)
2,467
2,350
2,200
2,100
2,100
1,669
2,143
2,275
Nickel ($/metric ton)
23,029
21,000
20,000
20,000
20,000
15,363
22,170
22,000
Corn ($/bushel)
5.6
5.3
5.3
5.2
5.1
3.8
4.2
5.2
Wheat ($/bushel)
7.1
6.6
7.2
7.1
6.5
5.3
5.9
6.6
12.0
10.5
10.6
10.4
10.2
10.2
10.0
10.4
Palladium ($/oz)
Soybeans ($/bushel)
Source: Datastream, J.P. Morgan Estimates
Updated as of October 28
147
Ben Laidler (1-212) 622-5252
[email protected]
Latin America Equity Research November 2010
Economic Forecasts: Currency Movements and Forecasts Brazilian Real (BRL) 2.8 2.6
15.0 14.0
2.4
13.0
2.2
J.P. Morgan
J.P. Morgan forecast: end Dec 10: 12.50 end Mar 11: 12.50 end Jun 11: 12.25
1.4 Dec 04
Apr 06
Jul 07
Nov 08
Feb 10
9.0 Dec 04
Jun 11
2,600 J.P. Morgan
2.5 Dec 04
Apr 06
Jul 07
38 36
Nov 08
Feb 10
Jun 11
1.60 1.50 J.P. Morgan
2,000 Consensus Feb 10
1,600 Dec 04
Jun 11
Consensus Apr 06
Jul 07
Nov 08
Feb 10
Jun 11
7.5
Consensus
28 Dec 04
Apr 06
Jul 07
Nov 08
Feb 10
6.0 Dec 04
39 36
Consensus
Jul 07
Nov 08
Feb 10
Jun 11
J.P. Morgan forecast: end Dec 10: 29.66 end Mar 11: 29.21 end Jun 11: 28.99
Consensus
33
J.P.Morgan
24
Feb 10
Jun 11
Dec 04
Apr 06
Jul 07
Jul 07
Nov 08
Feb 10
Jun 11
Nov 08
Expected % Gain vs USD till December 2010 (J.P. Morgan)
Consensus
J.P. Morgan forecast: end Dec 10: 79 end Mar 11: 81 end Jun 11: 83
75 Dec 04
Apr 06
J.P. Morgan
Jul 07
Nov 08
Feb 10
Jun 11
South African Rand (ZAR)
21 Nov 08
Apr 06
105
85
J.P. Morgan
27 Consensus
Jul 07
Consensus
115
95
Apr 06
J.P Morgan
Japansese Yen (JPY)
30
Apr 06
J.P. Morgan forecast: end Dec 10: 4.05 end Mar 11: 4.15 end Jun 11: 4.15
125
J.P. Morgan forecast: end Dec 10: 1.30 end Mar 11: 1.30 end Jun 11: 1.30
1.10 Dec 04
42
J.P. Morgan
6.5
Jun 11
Jun 11
Russian Rouble (RUB)
7.0
32
Feb 10
1.30
45
J.P. Morgan forecast: end Dec 10: 6.60 end Mar 11: 6.50 end Jun 11: 6.40
8.0 J.P. Morgan
Nov 08
1.40
Chinese Yuan Renminbi (CNY)
J.P. Morgan forecast: end Dec 10: 31.20 end Mar 11: 31.00 end Jun 11: 30.75
30
Jul 07
1.20
1,800
8.5
34
Apr 06
4.6 4.4 4.2 4.0 3.8 3.6 3.4 3.2 3.0 2.8 Dec 04
Euro (EUR)
1.70
2,200
Nov 08
400 Dec 04
1.80
2,400
Taiwan Dollar (TWD) 40
Jul 07
J.P. Morgan forecast: end Dec 10: 1800 end Mar 11: 1830 end Jun 11: 1850
2,800
3.3
2.7
500
Colombian Peso(COP) 3,000
J.P. Morgan forecast: end Dec 10: 2.78 end Mar 11: 2.84 end Jun 11: 2.82
Consensus
550 450
Apr 06
Peruvian Nuevo Sol (PEN) 3.5
3.1
700 600
Consensus
10.0
Consensus
750 650
11.0
1.8
2.9
J.P. Morgan
Argentinian Peso (ARS)
J.P. Morgan forecast: end Dec 10: 480 end Mar 11: 505 end Jun 11: 500
800
12.0
2.0 1.6
Chilean Peso (CLP)
Mexican Peso (MXN) 16.0
J.P. Morgan forecast: end Dec 10: 1.70 end Mar 11 : 1.80 end Jun 11: 1.82
3.0
Feb 10
Jun 11
J.P. Morgan forecast: 14.0 end Dec 10: 7.00 13.0 end Mar 11: 7.15 12.0 end Jun 11: 7.30 11.0 10.0 9.0 8.0 7.0 6.0 5.0 Dec 04 Apr 06 Jul 07
Consensus
J.P. Morgan Nov 08
Feb 10
Jun 11
Expected % Loss vs USD till December 2010 (J.P. Morgan) 0.5
8.0 7.0
(1.0)
6.0 5.0
(2.5)
4.0
(4.0)
3.0 (5.5)
2.0 1.0
148
Updated as of October 28
EUR
RUB
IDR
CLP
JPY
CNY
BRL
PHP
THB
MXN
TWD
INR
ARS
KRW
PLN
TRL
CZK
HUF
Source: Datastream, J.P. Morgan estimates, Bloomberg.
MYR
(7.0)
0.0
Ben Laidler (1-212) 622-5252
[email protected]
Latin America Equity Research November 2010
Flows and Positioning EM Managers’ Positioning Relative to MSCI EM: Major EM Markets
Country
OW-UW
< 0.1%
EM %
Regional and US Mutual Fund Flows
> 2% OW
< 2% UW
JPM reco
Russia
16 (17)
8 (11)
8 (6)
3 (3)
6.0
N
Indonesia
11 (9)
4 (4)
7 (5)
4 (4)
2.4
N
Total EM Equity****
Weekly Index
Net Weekly
2010 YTD
2009
12M
chg
Flows
Agg.
Agg.
Avg.
(%)
US$M
US$M
US$M
(x).
(0.2)
2,691
66,401
64,373
1.4
Mexico
10 (8)
5 (5)
5 (3)
3 (3)
4.2
N
Global EM Equity*
(0.2)
1,646
44,218
29,058
1.3
India
12 (10)
10 (7)
2 (3)
1 (1)
8.4
OW
LatAm Equity*
(1.3)
239
1,390
8,786
1.1
Brazil
11 (10)
10 (12)
1 (-2)
0 (0)
16.6
UW
EMEA Equity*
(1.3)
320
4,695
2,017
1.8
China+HK
11 (10)
14 (15)
-3 (-5)
0 (0)
17.8
N
Asia ex-Japan Equity*
0.2
458
15,131
19,108
0.7
South Africa
6 (6)
19 (20)
-13 (-14)
2 (2)
7.5
N
BRIC Equity*
(1.1)
28
966
5,404
0.3
Malaysia
2 (2)
18 (19)
-16 (-17)
12 (13)
2.9
OW
Japan Equity Funds
(1.6)
(108)
(1,461)
(5,461)
(0.5)
China
4 (5)
20 (24)
-16 (-19)
0 (0)
17.8
N
Developed Europe*
(1.7)
838
(10,765)
2,506
1.0
1 (2)
13.4
N
International Equity*
(1.4)
490
1,824
18,727
0.6
1 (1)
10.5
N
US Equity***
0.5
5,269
9,727
(8,290)
1.3
US Bond***
2.7
4,202
140,307
180,622
1.2
US Money Market***
0.1
17,329
(399,002)
(466,143)
1.8
Korea
5 (3)
23 (23)
-18 (-20)
Taiwan
1 (1)
28 (25)
-27 (-24)
Source: EPFR Global, MSCI, J.P. Morgan calculations. The survey covers 45 fund managers. The calculation of OW is greater than 2% overweight versus the MSCI benchmark. UW is less than -2% of benchmark weighting. Fund weightings are as of 30 September 2010 and MSCI weightings as of 1 October 2010. Numbers in brackets are the previous month values. Potentially China stocks have been misclassified as Hong Kong, hence the combined weight for Hong Kong and China. Hong Kong investment may be providing non-China exposure
Source: Bloomberg, J.P. Morgan, I:Net, MKK, Lipper FMI, MSCI, Datastream. *EPFR Global data. ***Data from Lipper FMI. BRIC Funds separated from EM Funds from 11 May 07. 12 month average column shows ratio of current flows to past 12 months rolling average. ****Total EM Equity includes Global EM, LatAm, EMEA, Asia ex Japan and BRIC funds.
Cumulative EM Fund Flows (US$ BN), by Year
2010 LatAm Funds Cumulative Total and ETF Flows (US$ MN)
120
1,500 2006
2007
2008
2009
90
2010
Total Flows
1,000
66.4
500
64.4
60
0
40.8
(500)
30 22.4
0
(1,000)
ETF Flows
(1,500) (2,000)
(30)
(2,500) (39.4)
(60) Jan
Feb
Mar
Apr
May
Jun
Jul
Aug
Sep
Oct
Nov
Dec
(3,000) Jan 10 Feb 10 Mar 10 Apr 10 May 10 Jun 10
Jul 10
Aug 10 Sep 10 Oct 10
Source: J.P. Morgan estimates, Bloomberg and EPFR
149
Ben Laidler (1-212) 622-5252
[email protected]
Latin America Equity Research November 2010
Economic Forecasts: Credit Risk External (2010E) Current External Debt Account 2010F** 2010F** (US$bil) %GDP %GDP
Foreign Reserves (US$bil) LATAM Argentina Brazil Colombia Mexico Peru EMEA Russia South Africa Poland Turkey Hungary Czech Republic Morocco* Jordan* Asia Korea Taiwan China India Malaysia Thailand Indonesia Philippines
Sovereign Ratings (Long Term Foreign Debt) Moody's Action
Rating
Rating
Aug-14-08 Sep-22-09 Jun-19-08 Jan-06-05 Dec-16-09
BBBBBBBBBB BBB-
Downgrade, O/L stable Upgrade, stable Upgrade, stable Downgrade, O/L changed to stable Upgrade, stable
Aug-11-08 30-Apr-08 30-Apr-08 Dec-14-09 30-Apr-08
Date
0.0 -2.4 -2.0 -0.8 -0.7
118.0 221.0 54.3 178.0 33.2
32.9 10.9 19.4 16.8 22.3
-1.5 -3.3 -2.7 -0.5 -1.9
-1.0 -3.4 -4.2 -2.5 -2.5
51.2 64.1 48.8 37.4 24.7
46.4 61.7 47.9 34.1 22.1
472.9 41.7 81.6 78.0 37.1 44.0 13.6 5.3
4.5 -5.0 -2.5 -4.8 0.5 -1.8 -0.9 -14.4
502.8 82.6 261.3 273.5 181.4 84.0 na na
33.5 24.0 51.0 37.4 141.6 44.5 na na
-5.9 -6.7 -7.1 -5.5 -4.0 -5.9 na na
-4.2 -5.0 -7.0 -3.4 -4.2 -5.0 na na
8.0 32.9 51.0 55.4 78.3 35.3 na na
7.9 38.2 53.2 49.0 79.3 38.5 na na
Baa1 A3 A2 Ba2 Baa1 A1 Ba1 Ba2
O/L changed to stable, Affirmed Upgrade, O/L changed to stable Affirmed, O/L stable Upgrade, O/L stable Downgrade, O/L (-) O/L changed to stable, Affirmed O/L changed to stable O/L changed to stable
Dec-12-08 Jul-16-09 Jan-05-10 Jan-08-10 Mar-31-09 Dec-08-08 Jun-18-03 Jan-08-07
BBB BBB+ ABB BBBA BB+ BB
O/L changed to stable, Affirmed O/L changed to (-), Affirmed O/L changed to stable, Affirmed Upgrade, O/L (+) O/L changed to stable, Affirmed Affirmed, O/L stable Upgrade, O/L stable Affirmed, O/L stable
Dec-21-09 Nov-11-08 Oct-27-08 Feb-19-10 Oct-2-09 Dec-21-09 Mar-23-10 Mar-12-10
290.1 387.7 2766.0 273.6 100.2 155.5 83.6 41.4
2.7 7.4 4.8 -3.3 15.6 3.7 0.6 4.8
402.9 na 443.6 277.9 70.0 72.3 183.0 56.5
42.3 na 7.5 16.0 33.7 22.6 26.2 27.8
-1.7 -3.6 -3.3 -6.8 -7.1 -3.9 -1.6 -3.9
-0.5 -1.5 -2.1 -5.1 -5.2 -2.5 -2.0 -4.0
44.4 na 19.3 42.3 53.3 34.2 35.8 52.6
42.8 na 19.0 41.1 46.9 34.4 32.5 49.3
A1 Aa3 A1 Baa3 A3 Baa1 Ba2 Ba3
Upgrade, O/L stable Affirmed, O/L stable Jan-24-02 O/L changed to (+), Affirmed Upgrade, O/L stable Upgrade, O/L stable Affirmed, O/L (-) Affirmed, O/L stable Affirmed, O/L stable
Apr-14-10 Jan-24-02 Nov-09-09 Jan-22-04 Dec-16-04 Apr-13-10 Jan-21-10 Mar-29-10
A AAA+ BBBABBB+ BB+ BB-
Affirmed, O/L stable O/L changed to (-), Affirmed Affirmed, O/L stable O/L changed to stable, Affirmed O/L changed to stable, Affirmed Affirmed, O/L (-) Upgrade, O/L (+) Affirmed, O/L stable
Jan-12-10 Apr-14-09 Jan-12-10 Mar-18-10 May-15-08 Apr-13-10 Mar-12-10 Apr-18-08
1000 900 800 700
EMBI Asia Spreads and Yields 800
11
15.0
700
10
600
9
400 300 200 Jul-09 Spread (L)
Mar-10
Yield
10.5
900
8 7
9.0
300
6
7.0
200
5
300
5.0
100 Oct-08
4
100 Oct-08
Mar-10Yield
12.5
1100
400
Jul-09 Spread (L)
1000
1300
500 11.0
500
EMBI Latin America Spreads and Yields
EMBI Europe Spreads and Yields
17.0
13.0
600
B3 O/L changed to stable Baa3 (+) Upgrade, O/L (+) Ba1 Upgrade, O/L stable Baa1 Upgrade, O/L stable Baa3 Upgrade, O/L changed stable
S&P Action
Date
51.2 262.8 26.5 111.8 32.5
EMBI Global Spreads and Yields
100 Oct-08
Fiscal Position Fiscal Deficit Public Sector Debt 2010F** 2011F** 2009 2010F** % GDP % GDP % GDP % GDP
700
8.5
500 6.5 4.5 Jul-09 Spread (L)
Source: Bloomberg, J.P. Morgan Source: Bloomberg, J.P. Morgan Source: Bloomberg, J.P. Morgan Source: CEIC, J.P. Morgan estimates, Moody's, Standard & Poor's, Bloomberg * Data from World Economic Outlook for October 2009, ** F denotes forecast.
Mar-10 Yield
18.0
900 800
15.0
700 600
12.0
500 400
9.0
300 200 100 Oct-08
6.0 Jul-09 Spread (L)
Mar-10 Yield
Source: Bloomberg, J.P. Morgan Updated as of October 28
150
Ben Laidler (1-212) 622-5252
[email protected]
Latin America Equity Research November 2010
Perspective: Demographic and Key Economic Statistics Population## 2010E Growth million %YoY USA
Population and Demographics Age Dependency Ratio* Young Old
Nominal GDP Gross Enrollment Ratio Secondary**
US$ billion
Per capita (US$)
2010E
10 year CAGR*** Total Per capita (%) (%)
Real GDP 10 year CAGR*** Total Per capita (%) (%)
310
1.0
na
na
98
14,646
47,213
4.1
3.1
3.0
2.0
Brazil# Chile Colombia Mexico Peru
194 17 46 111 30
1.2 1.0 1.5 1.0 1.2
0.4 0.4 0.5 0.5 0.5
0.1 0.1 0.1 0.1 0.1
102 89 75 80 92
2095 199 298 1046 150
10822 11632 6418 9450 5085
12.5 10.2 13.5 6.1 10.9
11.1 8.9 12.5 4.8 9.2
3.1 3.6 3.9 1.5 5.4
1.7 2.3 2.2 0.4 3.8
Russia# South Africa Israel Poland Turkey Hungary Egypt Czech Rep. Morocco Jordan
141 49 7 38 76 10 78 10 32 6
-0.1 0.7 2.2 -0.1 1.2 -0.1 2.0 0.2 1.4 2.3
0.2 0.5 0.4 0.2 0.4 0.2 0.5 0.2 0.5 0.5
0.2 0.1 0.2 0.2 0.1 0.2 0.1 0.2 0.1 0.1
93 90 93 97 79 97 87 96 48 87
1598 371 199 473 714 130 216 199 94 25
11316 7581 26845 12450 9426 13008 2759 19198 2909 4062
19.9 10.8 5.1 10.7 13.7 10.5 8.1 13.4 9.8 11.4
20.4 9.8 3.1 10.8 12.1 10.7 5.9 13.2 8.4 8.8
5.9 3.2 2.8 3.6 3.2 1.9 4.9 3.1 4.9 6.3
6.4 2.2 0.5 3.8 1.9 2.1 2.8 3.0 3.8 3.9
Korea Taiwan China India Thailand Indonesia Philippines
48 23 1354 1184 68 233 94
0.1 0.3 0.6 1.3 0.7 1.2 1.8
0.3 0.3 0.3 0.5 0.3 0.4 0.6
0.1 0.1 0.1 0.1 0.1 0.1 0.1
91 na 73 54 77 64 86
1013 430 6016 1682 325 729 196
20981 18531 4441 1415 4709 3129 2081
6.6 2.8 17.6 13.8 10.2 16.0 9.9
6.2 2.4 16.8 12.1 9.2 14.5 7.9
6.0 3.3 10.4 10.0 4.4 5.2 4.6
5.6 2.9 9.7 8.4 3.5 3.9 2.7
LATAM
EMEA
Asia
Source: CEIC, Datastream, Bloomberg, US Consensus Bureau, World Bank, IMF, UNESCO, J.P. Morgan estimates * Age dependency ratio defined as dependents to working-age population. ** Gross Enrollment Ratio is defined as pupils enrolled in a secondary level, regardless of age expressed as a percentage of the population in the relevant official age group *** 10-year CAGR for period 1999-2009, in local currency. # CAGR for period 1999-2009 ## Population data based on IMF estimate as on July 2007 Data for Gross enrollment data for 2004 except for Malaysia, Brazil and Argentina which is for 2003
Updated as of October 28
151
Ben Laidler (1-212) 622-5252
[email protected]
Latin America Equity Research November 2010
Perspective: Global Emerging Capital Markets MSCI EMF Index
Markets Concentration
JPM EMBI Global
Total Market Cap
Estimated Free Float
Companies
Average Daily Turnover
% of Emerging Market Trading Volume
Weighting in MSCI EMF
Stocks constituting 75% of Country Market Cap
Stocks constituting 75% of Country Market Cap
Market Capitalisation
Issues
US$ Bn
(%)
Number
US $ Mn
%
(%)
Number
(%)
US$ Bn
Number
1007 171 147 283 60
58 36 22 56 46
75 16 8 21 3
2980 146 49 337 145
16 1 0 2 1
16 2 1 4 1
16 9 4 7 2
17 69 50 29 67
50 5 7 50 8
23 8 7 29 8
640 383 129 215 27 36 41 29
35 70 45 32 60 47 34 21
28 45 22 20 4 10 4 3
1426 1019 214 641 81 53 55 6
8 5 1 3 0 0 0 0
6 7 2 2 0 0 0 0
5 17 7 11 2 7 3 4
25 40 23 60 75 30 50 100
33 4 3 22 1 1 na 1
4 4 3 14 1 1 na 1
779 554 1363 847 256 172 214 57 7407
63 70 49 35 41 36 41 33 49
99 118 125 60 39 20 22 12 754
3766 2207 4088 336 292 494 252 44 18629
20 12 22 2 2 3 1 0 100
13 11 18 8 3 2 2 1 100
28 31 9 22 20 14 10 7
18 25 15 33 62 70 41 67
na na 7 na 9 na 6 19 232
na na 8 na 7 na 5 14 141
LATAM Brazil Chile Colombia Mexico Peru EMEA Russia South Africa Poland Turkey Hungary Egypt Czech Republic Morocco ASIA Korea Taiwan China India Malaysia Thailand Indonesia Philippines Total
AC World Index Market Capitalisation
MSCI Regional Market Capitalisation
Emerging Markets 11% Japan 8% Developed Asia 5% Developed Europe 26%
Source: MSCI, J.P. Morgan
152
EM Latin America 24% North America 47%
EM Asia 58%
EM Europe and Middle East 18%
Top 8 versus Rest of Emerging Markets India Russia 8% 6% Mexico 4%
Rest of EM 16% Korea 13% Taiwan 11%
China 19% Brazil 16%
South Africa 7%
Updated as of October 28
Ben Laidler (1-212) 622-5252
[email protected]
Latin America Equity Research November 2010
Perspective: MSCI Emerging Market Index Composition by Countries and Sectors
Source: MSCI, J. P. Morgan
1.1 2.0 1.0 0.3 0.4 0.4 0.4 0.0 0.0 4.5 6.8
0.8 0.6 1.1 0.2 0.5 0.4 0.3 0.2
4.5 0.4 3.1 0.1 1.1 0.0 0.3 0.7
3.2 6.8
5.7 14.1
5.4 2.1 7.1 1.6 2.2 0.9 0.7 0.6 0.2 15.5 26.1
0.3
0.3 0.0 0.2
0.0
0.1 0.1
0.2 0.1 0.1 0.3
0.5 0.8
0.7 2.2 1.4 0.4 0.9 0.5 0.1 0.1 5.6 7.3
0.0
0.0 3.6 1.0 6.1 1.3
3.0 1.9 1.0 1.4 0.9 0.0 0.2 0.1
12.0 12.3
5.6 14.4
Telecom Services
1.1
4.1 0.7 0.4 0.5 0.1 5.8 0.9 1.9 0.2 0.0
0.4 1.7 0.0
2.1 0.4 0.9 0.1 0.2 0.0 0.1 0.1 0.1 2.0 0.4 2.1 0.5 0.1 0.3 0.3 0.1 0.1 3.8 7.9
Total
0.0
0.2
0.3
7407
Utilities
1.0 0.0 0.0
0.5 0.2 0.3
M aterials
0.3 3.9 3.3 0.7 0.2 0.1 0.1
Inform ation Technology
0.1 2.8 0.2 0.4 0.0 0.2
1.3
4.2 0.3 0.2 0.2 0.3 5.3 1.0 1.9 0.8 1.1 0.2 0.2 0.1 0.1
Health care
3.7
Financials
1.4 1.1 0.3
Energy
0.8 0.4 0.1
Industrials
Brazil Mexico Chile Peru Colombia LatAm Russia South Africa Poland Turkey Hungary Egypt Czech Republic Morocco Jordan EMEA Korea China Taiwan India Malaysia Indonesia Thailand Philippines Asia Total
Total Market Capitalization (in billion US$): Consum er Staples
MSCI Emerging Markets Free Index
754
Consum er Discretionary
Number of Companies:
0.8
16.1 4.4 1.7 0.8 0.9 23.8 6.1 7.3 1.6 1.9 0.4 0.5 0.4 0.2
0.4 0.1 1.3 0.3 0.1
0.2
0.7 0.2 0.3 0.4 0.3 0.1 0.0 0.1 1.5 3.5
18.3 13.4 18.3 10.6 8.1 2.9 2.4 1.7 0.5 57.9 100.0
Updated as of October 28
153
Ben Laidler (1-212) 622-5252
[email protected]
Latin America Equity Research November 2010
Other companies recommended in this report (and priced as of October 28, 2010): Bladex (BLX/US$15.29/OW) Cielo (CIEL3.SA/R$14.60/Neutral) Coca-Cola FEMSA (KOF/US$78.40/Neutral) Compania Cervecerias Unidas (CCU/US$56.05/Overweight) Fleury (FLRY3.SA/R$21.85/Neutral) Grupo Modelo (GMODELOC.MX/Ps68.67/Overweight) Heineken (HEIN.AS/€36.34/Neutral) Itau Unibanco Holding SA (ITUB4.SA/R$41.14/Overweight) Redecard (RDCD3.SA/R$22.50/Neutral) SABESP (SBSP3.SA/R$39.79/Neutral) Southern Copper Corporation (SCCO/US$43.08/Neutral) Souza Cruz SA (CRUZ3.SA/R$86.60/Neutral) Telesp (TSP/US$24.24/Overweight) Vallourec (VLLP.PA/€74.75/Overweight) Vivo Participacoes (VIV/US$28.18/Overweight)
154
Ben Laidler (1-212) 622-5252
[email protected]
Latin America Equity Research November 2010
LatAm Equity Research Ben Laidler, Director of Research Equity Strategy / Special Situations Ben Laidler (LatAm & Mexico) Emy Shayo (Brazil) Brian Chase (Chile/Argentina/Andes) Vinay Joseph (LatAm) Pablo Monsivais (Mexico) Economics / Fixed Income Strategy Joyce Chang (Head of GEM Strategy) Luis Oganes (Head of LatAm Economics) Fabio Akira Hashizume (Brazil) Gabriel Casillas (Mexico) Julio Callegari (Brazil, Colombia & Peru) Franco Uccelli (Central America & Caribbean) Neeraj Arora (Central America & Caribbean) Ben Ramsey (Andes) Vladimir Werning (Argentina & Chile) Agribusiness / Pulp & Paper Debbie Bobovnikova Lucas Ferreira Basic Materials Rodolfo Angele (Steel & Mining) Rodrigo Fernandes Mandeep Singh Manihani John Bridges (Precious Metals) Cement / Construction / Homebuilders Adrian Huerta Marcelo Motta Varun Ginodia Financials / Exchanges / Merchant Acquirers Saul Martinez Frederic de Mariz (SMid Cap Financials) Mariana Barros Marina Mansur Ken Worthington (Exchanges) Retail / Healthcare / Cosmetics Andrea Teixeira Joao Mamede Felipe Oliveira Beverages / Food / Tobacco Alan Alanis Sambuddha Ray Pedro Leduc Telecoms / Media / Technology Andre Baggio Rajneesh Jhawar Anna Daher Transport / Aerospace / Industrials Fernando Abdalla Adrian Huerta (Airports) Jamie Baker (Airlines) Joe Nadol (Aerospace) Utilities & Concessions Anderson Frey Pedro Manfredini Energy / Petrochemicals Sergio Torres Felipe Dos Santos
[email protected]
+1 212 622 5252
[email protected] [email protected] [email protected] [email protected] [email protected]
+1 212 622 5252 +55 11 3048 6684 +56 2 425 5245 +91 22 6157 3323 +52 55 5540 9374
[email protected] [email protected] [email protected] [email protected] [email protected] [email protected] [email protected] [email protected] [email protected]
+1 212 834 4203 +1 212 834 4326 +55 11 3048 3634 +52 55 5540 9558 +55 11 3048 3369 +1 305 579 9415 +1 212 834 4321 +1 212 834 4308 +1 212 834 4144
[email protected] [email protected]
+1 212 622 3489 +55 11 3048 3629
[email protected] [email protected] [email protected] [email protected]
+55 11 3048 3888 +55 11 3048 3983 +1 212 622 6433 +1 212 622 6430
[email protected] [email protected] [email protected]
+52 81 8152 8720 +55 11 3048 6712 +91 22 6157 3321
[email protected] [email protected] [email protected] [email protected] [email protected]
+1 212 622 3602 +55 11 3048 3398 +55 11 3048 3480 +55 11 3048 3893 +1 212 622 6613
[email protected] [email protected] [email protected]
+1 212 622 6735 +55 11 3048 3711 +55 11 3048 3892
[email protected] [email protected] [email protected]
+1 212 622 3697 +91 22 6157 3310 +55 11 3048 3824
[email protected] [email protected] [email protected]
+55 11 3048 3427 +1 212 622 6480 +55 11 3048 3756
[email protected] [email protected] [email protected] [email protected]
+55 11 3048 3463 +52 81 8152 8720 +1 212 622 6713 +1 212 622 6548
[email protected] [email protected]
+1 212 622 6615 +55 11 3048 3896
[email protected] [email protected]
+1 212 622 3378 +55 11 3048 3796 155
Ben Laidler (1-212) 622-5252
[email protected]
156
Latin America Equity Research November 2010
Ben Laidler (1-212) 622-5252
[email protected]
Latin America Equity Research November 2010
157
Ben Laidler (1-212) 622-5252
[email protected]
Latin America Equity Research November 2010
Disclosures Analyst Certification: The research analyst(s) denoted by an “AC” on the cover of this report certifies (or, where multiple research analysts are primarily responsible for this report, the research analyst denoted by an “AC” on the cover or within the document individually certifies, with respect to each security or issuer that the research analyst covers in this research) that: (1) all of the views expressed in this report accurately reflect his or her personal views about any and all of the subject securities or issuers; and (2) no part of any of the research analyst’s compensation was, is, or will be directly or indirectly related to the specific recommendations or views expressed by the research analyst(s) in this report. In compliance with Instruction 483, issued by Comissão de Valores Mobiliários (the Brazilian securities commission) on July 6, 2010, the Brazilian primary analyst signing this report declares: (1) that all the views expressed herein accurately reflect his or her personal views about the securities and issuers; (2) that all recommendations issued by him or her were independently produced, including from the entity in which he or she is an employee; and (3) that he or she will set forth any situation or conflict of interest believed to impact the impartiality of the recommendations herein, as per article 17, II of Instruction 483.
Important Disclosures Important Disclosures for Equity Research Compendium Reports: Important disclosures, including price charts for all companies under coverage for at least one year, are available through the search function on J.P. Morgan’s website https://mm.jpmorgan.com/disclosures/company or by calling this U.S. toll-free number (1-800-477-0406) • MSCI: The MSCI sourced information is the exclusive property of Morgan Stanley Capital International Inc. (MSCI). Without prior written permission of MSCI, this information and any other MSCI intellectual property may not be reproduced, redisseminated or used to create any financial products, including any indices. This information is provided on an 'as is' basis. The user assumes the entire risk of any use made of this information. MSCI, its affiliates and any third party involved in, or related to, computing or compiling the information hereby expressly disclaim all warranties of originality, accuracy, completeness, merchantability or fitness for a particular purpose with respect to any of this information. Without limiting any of the foregoing, in no event shall MSCI, any of its affiliates or any third party involved in, or related to, computing or compiling the information have any liability for any damages of any kind. MSCI, Morgan Stanley Capital International and the MSCI indexes are services marks of MSCI and its affiliates. Explanation of Equity Research Ratings and Analyst(s) Coverage Universe: J.P. Morgan uses the following rating system: Overweight [Over the next six to twelve months, we expect this stock will outperform the average total return of the stocks in the analyst’s (or the analyst’s team’s) coverage universe.] Neutral [Over the next six to twelve months, we expect this stock will perform in line with the average total return of the stocks in the analyst’s (or the analyst’s team’s) coverage universe.] Underweight [Over the next six to twelve months, we expect this stock will underperform the average total return of the stocks in the analyst’s (or the analyst’s team’s) coverage universe.] J.P. Morgan Cazenove’s UK Small/Mid-Cap dedicated research analysts use the same rating categories; however, each stock’s expected total return is compared to the expected total return of the FTSE All Share Index, not to those analysts’ coverage universe. A list of these analysts is available on request. The analyst or analyst’s team’s coverage universe is the sector and/or country shown on the cover of each publication. If it does not appear in this report, the certifying analyst(s)’ coverage universe can be found on J.P. Morgan’s research website, www.morganmarkets.com. J.P. Morgan Equity Research Ratings Distribution, as of September 30, 2010 Overweight Neutral Underweight (buy) (hold) (sell) J.P. Morgan Global Equity Research Coverage 46% 43% 12% IB clients* 49% 45% 33% JPMS Equity Research Coverage 43% 48% 8% IB clients* 69% 60% 50% *Percentage of investment banking clients in each rating category. For purposes only of FINRA/NYSE ratings distribution rules, our Overweight rating falls into a buy rating category; our Neutral rating falls into a hold rating category; and our Underweight rating falls into a sell rating category.
Valuation and Risks: Please see the most recent company-specific research report for an analysis of valuation methodology and risks on any securities recommended herein. Research is available at http://www.morganmarkets.com, or you can contact the analyst named on the front of this note or your J.P. Morgan representative. Analysts’ Compensation: The equity research analysts responsible for the preparation of this report receive compensation based upon various factors, including the quality and accuracy of research, client feedback, competitive factors, and overall firm revenues, which include revenues from, among other business units, Institutional Equities and Investment Banking. 158
Ben Laidler (1-212) 622-5252
[email protected]
Latin America Equity Research November 2010
Registration of non-US Analysts: Unless otherwise noted, the non-US analysts listed on the front of this report are employees of nonUS affiliates of JPMSI, are not registered/qualified as research analysts under NASD/NYSE rules, may not be associated persons of JPMSI, and may not be subject to NASD Rule 2711 and NYSE Rule 472 restrictions on communications with covered companies, public appearances, and trading securities held by a research analyst account.
Other Disclosures J.P. Morgan ("JPM") is the global brand name for J.P. Morgan Securities LLC ("JPMS") and its affiliates worldwide. J.P. Morgan Cazenove is a marketing name for the U.K. investment banking businesses and EMEA cash equities and equity research businesses of JPMorgan Chase & Co. and its subsidiaries. Options related research: If the information contained herein regards options related research, such information is available only to persons who have received the proper option risk disclosure documents. For a copy of the Option Clearing Corporation’s Characteristics and Risks of Standardized Options, please contact your J.P. Morgan Representative or visit the OCC’s website at http://www.optionsclearing.com/publications/risks/riskstoc.pdf. Legal Entities Disclosures U.S.: JPMS is a member of NYSE, FINRA and SIPC. J.P. Morgan Futures Inc. is a member of the NFA. JPMorgan Chase Bank, N.A. is a member of FDIC and is authorized and regulated in the UK by the Financial Services Authority. U.K.: J.P. Morgan Securities Ltd. (JPMSL) is a member of the London Stock Exchange and is authorized and regulated by the Financial Services Authority. Registered in England & Wales No. 2711006. Registered Office 125 London Wall, London EC2Y 5AJ. South Africa: J.P. Morgan Equities Limited is a member of the Johannesburg Securities Exchange and is regulated by the FSB. Hong Kong: J.P. Morgan Securities (Asia Pacific) Limited (CE number AAJ321) is regulated by the Hong Kong Monetary Authority and the Securities and Futures Commission in Hong Kong. Korea: J.P. Morgan Securities (Far East) Ltd, Seoul Branch, is regulated by the Korea Financial Supervisory Service. Australia: J.P. Morgan Australia Limited (ABN 52 002 888 011/AFS Licence No: 238188) is regulated by ASIC and J.P. Morgan Securities Australia Limited (ABN 61 003 245 234/AFS Licence No: 238066) is a Market Participant with the ASX and regulated by ASIC. Taiwan: J.P.Morgan Securities (Taiwan) Limited is a participant of the Taiwan Stock Exchange (company-type) and regulated by the Taiwan Securities and Futures Bureau. India: J.P. Morgan India Private Limited is a member of the National Stock Exchange of India Limited and Bombay Stock Exchange Limited and is regulated by the Securities and Exchange Board of India. Thailand: JPMorgan Securities (Thailand) Limited is a member of the Stock Exchange of Thailand and is regulated by the Ministry of Finance and the Securities and Exchange Commission. Indonesia: PT J.P. Morgan Securities Indonesia is a member of the Indonesia Stock Exchange and is regulated by the BAPEPAM LK. Philippines: J.P. Morgan Securities Philippines Inc. is a member of the Philippine Stock Exchange and is regulated by the Securities and Exchange Commission. Brazil: Banco J.P. Morgan S.A. is regulated by the Comissao de Valores Mobiliarios (CVM) and by the Central Bank of Brazil. Mexico: J.P. Morgan Casa de Bolsa, S.A. de C.V., J.P. Morgan Grupo Financiero is a member of the Mexican Stock Exchange and authorized to act as a broker dealer by the National Banking and Securities Exchange Commission. Singapore: This material is issued and distributed in Singapore by J.P. Morgan Securities Singapore Private Limited (JPMSS) [MICA (P) 020/01/2010 and Co. Reg. No.: 199405335R] which is a member of the Singapore Exchange Securities Trading Limited and is regulated by the Monetary Authority of Singapore (MAS) and/or JPMorgan Chase Bank, N.A., Singapore branch (JPMCB Singapore) which is regulated by the MAS. Malaysia: This material is issued and distributed in Malaysia by JPMorgan Securities (Malaysia) Sdn Bhd (18146-X) which is a Participating Organization of Bursa Malaysia Berhad and a holder of Capital Markets Services License issued by the Securities Commission in Malaysia. Pakistan: J. P. Morgan Pakistan Broking (Pvt.) Ltd is a member of the Karachi Stock Exchange and regulated by the Securities and Exchange Commission of Pakistan. Saudi Arabia: J.P. Morgan Saudi Arabia Ltd. is authorized by the Capital Market Authority of the Kingdom of Saudi Arabia (CMA) to carry out dealing as an agent, arranging, advising and custody, with respect to securities business under licence number 35-07079 and its registered address is at 8th Floor, Al-Faisaliyah Tower, King Fahad Road, P.O. Box 51907, Riyadh 11553, Kingdom of Saudi Arabia. Dubai: JPMorgan Chase Bank, N.A., Dubai Branch is regulated by the Dubai Financial Services Authority (DFSA) and its registered address is Dubai International Financial Centre - Building 3, Level 7, PO Box 506551, Dubai, UAE. Country and Region Specific Disclosures U.K. and European Economic Area (EEA): Unless specified to the contrary, issued and approved for distribution in the U.K. and the EEA by JPMSL. Investment research issued by JPMSL has been prepared in accordance with JPMSL's policies for managing conflicts of interest arising as a result of publication and distribution of investment research. Many European regulators require a firm to establish, implement and maintain such a policy. This report has been issued in the U.K. only to persons of a kind described in Article 19 (5), 38, 47 and 49 of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005 (all such persons being referred to as "relevant persons"). This document must not be acted on or relied on by persons who are not relevant persons. Any investment or investment activity to which this document relates is only available to relevant persons and will be engaged in only with relevant persons. In other EEA countries, the report has been issued to persons regarded as professional investors (or equivalent) in their home jurisdiction. Australia: This material is issued and distributed by JPMSAL in Australia to “wholesale clients” only. JPMSAL does not issue or distribute this material to “retail clients.” The recipient of this material must not distribute it to any third party or outside Australia without the prior written consent of JPMSAL. For the purposes of this paragraph the terms “wholesale client” and “retail client” have the meanings given to them in section 761G of the Corporations Act 2001. Germany: This material is distributed in Germany by J.P. Morgan Securities Ltd., Frankfurt Branch and J.P.Morgan Chase Bank, N.A., Frankfurt Branch which are regulated by the Bundesanstalt für Finanzdienstleistungsaufsicht. Hong Kong: The 1% ownership disclosure as of the previous month end satisfies the requirements under Paragraph 16.5(a) of the Hong Kong Code of Conduct for Persons Licensed by or Registered with the Securities and Futures Commission. (For research published within the first ten days of the month, the disclosure may be based on the month end data from two months’ prior.) J.P. Morgan Broking (Hong Kong) Limited is the liquidity provider for derivative warrants issued by J.P. Morgan Structured Products B.V. and listed on the Stock Exchange of Hong Kong Limited. An updated list can be found on HKEx website: http://www.hkex.com.hk/prod/dw/Lp.htm. Japan: There is a risk that a loss may occur due to a change in the price of the
159
Ben Laidler (1-212) 622-5252
[email protected]
Latin America Equity Research November 2010
shares in the case of share trading, and that a loss may occur due to the exchange rate in the case of foreign share trading. In the case of share trading, JPMorgan Securities Japan Co., Ltd., will be receiving a brokerage fee and consumption tax (shouhizei) calculated by multiplying the executed price by the commission rate which was individually agreed between JPMorgan Securities Japan Co., Ltd., and the customer in advance. Financial Instruments Firms: JPMorgan Securities Japan Co., Ltd., Kanto Local Finance Bureau (kinsho) No. 82 Participating Association / Japan Securities Dealers Association, The Financial Futures Association of Japan. Korea: This report may have been edited or contributed to from time to time by affiliates of J.P. Morgan Securities (Far East) Ltd, Seoul Branch. Singapore: JPMSS and/or its affiliates may have a holding in any of the securities discussed in this report; for securities where the holding is 1% or greater, the specific holding is disclosed in the Important Disclosures section above. India: For private circulation only, not for sale. Pakistan: For private circulation only, not for sale. New Zealand: This material is issued and distributed by JPMSAL in New Zealand only to persons whose principal business is the investment of money or who, in the course of and for the purposes of their business, habitually invest money. JPMSAL does not issue or distribute this material to members of "the public" as determined in accordance with section 3 of the Securities Act 1978. The recipient of this material must not distribute it to any third party or outside New Zealand without the prior written consent of JPMSAL. Canada: The information contained herein is not, and under no circumstances is to be construed as, a prospectus, an advertisement, a public offering, an offer to sell securities described herein, or solicitation of an offer to buy securities described herein, in Canada or any province or territory thereof. Any offer or sale of the securities described herein in Canada will be made only under an exemption from the requirements to file a prospectus with the relevant Canadian securities regulators and only by a dealer properly registered under applicable securities laws or, alternatively, pursuant to an exemption from the dealer registration requirement in the relevant province or territory of Canada in which such offer or sale is made. The information contained herein is under no circumstances to be construed as investment advice in any province or territory of Canada and is not tailored to the needs of the recipient. To the extent that the information contained herein references securities of an issuer incorporated, formed or created under the laws of Canada or a province or territory of Canada, any trades in such securities must be conducted through a dealer registered in Canada. No securities commission or similar regulatory authority in Canada has reviewed or in any way passed judgment upon these materials, the information contained herein or the merits of the securities described herein, and any representation to the contrary is an offence. Dubai: This report has been issued to persons regarded as professional clients as defined under the DFSA rules. General: Additional information is available upon request. Information has been obtained from sources believed to be reliable but JPMorgan Chase & Co. or its affiliates and/or subsidiaries (collectively J.P. Morgan) do not warrant its completeness or accuracy except with respect to any disclosures relative to JPMS and/or its affiliates and the analyst’s involvement with the issuer that is the subject of the research. All pricing is as of the close of market for the securities discussed, unless otherwise stated. Opinions and estimates constitute our judgment as of the date of this material and are subject to change without notice. Past performance is not indicative of future results. This material is not intended as an offer or solicitation for the purchase or sale of any financial instrument. The opinions and recommendations herein do not take into account individual client circumstances, objectives, or needs and are not intended as recommendations of particular securities, financial instruments or strategies to particular clients. The recipient of this report must make its own independent decisions regarding any securities or financial instruments mentioned herein. JPMS distributes in the U.S. research published by non-U.S. affiliates and accepts responsibility for its contents. Periodic updates may be provided on companies/industries based on company specific developments or announcements, market conditions or any other publicly available information. Clients should contact analysts and execute transactions through a J.P. Morgan subsidiary or affiliate in their home jurisdiction unless governing law permits otherwise. “Other Disclosures” last revised September 1, 2010.
Copyright 2010 JPMorgan Chase & Co. All rights reserved. This report or any portion hereof may not be reprinted, sold or redistributed without the written consent of J.P. Morgan.
160